The size of Martin Marietta Materials, Inc. (NYSE:MLM), a US$11b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, its financial health remains the key to continued success. This article will examine Martin Marietta Materials’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into MLM here.
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Does MLM produce enough cash relative to debt?
Over the past year, MLM has ramped up its debt from US$1.7b to US$3.2b – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$54m , ready to deploy into the business. Moreover, MLM has produced cash from operations of US$681m in the last twelve months, resulting in an operating cash to total debt ratio of 21%, signalling that MLM’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MLM’s case, it is able to generate 0.21x cash from its debt capital.
Can MLM meet its short-term obligations with the cash in hand?
With current liabilities at US$773m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.88x. Generally, for Basic Materials companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can MLM service its debt comfortably?
MLM is a relatively highly levered company with a debt-to-equity of 65%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can assess the sustainability of MLM’s debt levels to the test by looking at how well interest payments are covered by earnings. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In MLM’s case, the ratio of 5.96x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like MLM are considered a risk-averse investment.
MLM’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for MLM’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Martin Marietta Materials to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MLM’s future growth? Take a look at our free research report of analyst consensus for MLM’s outlook.
- Valuation: What is MLM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MLM is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.