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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Sonoco Products Company (NYSE:SON), with a market cap of US$6.5b, 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. This article will examine SON’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SON here.
SON’s Debt (And Cash Flows)
SON has built up its total debt levels in the last twelve months, from US$1.5b to US$1.7b , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$124m to keep the business going. Additionally, SON has generated US$562m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 33%, indicating that SON’s current level of operating cash is high enough to cover debt.
Can SON meet its short-term obligations with the cash in hand?
Looking at SON’s US$1.2b in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 1.36x. The current ratio is calculated by dividing current assets by current liabilities. For Packaging companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can SON service its debt comfortably?
With debt reaching 78% of equity, SON may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SON’s case, the ratio of 8.31x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SON ample headroom to grow its debt facilities.
SON’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how SON has been performing in the past. You should continue to research Sonoco Products to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SON’s future growth? Take a look at our free research report of analyst consensus for SON’s outlook.
- Valuation: What is SON 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 SON 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 email@example.com. 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.