Are NewMarket Corporation’s (NYSE:NEU) Interest Costs Too High?

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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as NewMarket Corporation (NYSE:NEU), with a market cap of US$4.6b, often get neglected by retail investors. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Let’s take a look at NEU’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into NEU here.

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How much cash does NEU generate through its operations?

Over the past year, NEU has ramped up its debt from US$612m to US$818m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$148m for investing into the business. On top of this, NEU has produced US$166m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 20%, signalling that NEU’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NEU’s case, it is able to generate 0.2x cash from its debt capital.

Can NEU meet its short-term obligations with the cash in hand?

At the current liabilities level of US$279m, it appears that the company has been able to meet these obligations given the level of current assets of US$915m, with a current ratio of 3.28x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

NYSE:NEU Historical Debt February 6th 19
NYSE:NEU Historical Debt February 6th 19

Does NEU face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, NEU is a highly leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if NEU’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For NEU, the ratio of 12.45x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although NEU’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. Since there is also no concerns around NEU’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how NEU has been performing in the past. You should continue to research NewMarket to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NEU’s future growth? Take a look at our free research report of analyst consensus for NEU’s outlook.
  2. Valuation: What is NEU 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 NEU is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.