Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as The Mosaic Company (NYSE:MOS) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to their continued success lies in its financial health. Let’s take a look at Mosaic’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into MOS here.
How much cash does MOS generate through its operations?
Over the past year, MOS has ramped up its debt from US$3.9b to US$5.0b – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$1.0b for investing into the business. Moreover, MOS has generated US$1.3b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 26%, meaning that MOS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In MOS’s case, it is able to generate 0.26x cash from its debt capital.
Can MOS pay its short-term liabilities?
Looking at MOS’s most recent US$2.6b liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$4.2b, leading to a 1.61x current account ratio. Generally, for Chemicals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is MOS’s debt level acceptable?
With a debt-to-equity ratio of 48%, MOS can be considered as an above-average leveraged company. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. However, since MOS is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although MOS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for MOS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Mosaic to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MOS’s future growth? Take a look at our free research report of analyst consensus for MOS’s outlook.
- Valuation: What is MOS 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 MOS 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.