There are a number of reasons that attract investors towards large-cap companies such as The Mosaic Company (NYSE:MOS), with a market cap of US$10b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, its financial health remains the key to continued success. This article will examine Mosaic’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. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into MOS here.
MOS’s Debt (And Cash Flows)
Over the past year, MOS has reduced its debt from US$5.2b to US$4.5b – this includes long-term debt. With this debt repayment, MOS currently has US$848m remaining in cash and short-term investments to keep the business going. On top of this, MOS has generated US$1.4b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 31%, signalling that MOS’s debt is appropriately covered by operating cash.
Can MOS meet its short-term obligations with the cash in hand?
With current liabilities at US$2.5b, it seems that the business has been able to meet these obligations given the level of current assets of US$4.2b, with a current ratio of 1.71x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MOS’s debt level acceptable?
With debt reaching 43% of equity, MOS may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if MOS’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For MOS, the ratio of 6.32x suggests that interest is appropriately covered. Large-cap investments like MOS are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
MOS’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around MOS’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure MOS has company-specific issues impacting its capital structure decisions. I recommend 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.