Are Sociedad Química y Minera de Chile SA’s (NYSE:SQM) Interest Costs Too High?

Sociedad Química y Minera de Chile SA (NYSE:SQM), a large-cap worth US$12.79b, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the health of the financials determines whether the company continues to succeed. Let’s take a look at Sociedad Química y Minera de Chile’s leverage and assess its financial strength 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 high-level overview, so I encourage you to look further into SQM here.

Check out our latest analysis for Sociedad Química y Minera de Chile

How does SQM’s operating cash flow stack up against its debt?

SQM has sustained its debt level by about US$1.17b over the last 12 months comprising of short- and long-term debt. At this current level of debt, SQM currently has US$986.54m remaining in cash and short-term investments , ready to deploy into the business. On top of this, SQM has generated US$766.75m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 65.32%, indicating that SQM’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SQM’s case, it is able to generate 0.65x cash from its debt capital.

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

At the current liabilities level of US$769.49m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.22x. However, anything above 3x is considered high and could mean that SQM has too much idle capital in low-earning investments.

NYSE:SQM Historical Debt August 16th 18
NYSE:SQM Historical Debt August 16th 18

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

SQM is a relatively highly levered company with a debt-to-equity of 52.10%. 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. 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. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For SQM, the ratio of 20.06x suggests that interest is comfortably covered. Large-cap investments like SQM are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

SQM’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 SQM has been performing in the past. I recommend you continue to research Sociedad Química y Minera de Chile to get a more holistic view of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SQM’s future growth? Take a look at our free research report of analyst consensus for SQM’s outlook.
  2. Valuation: What is SQM 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 SQM 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.