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Has Associated British Foods plc (LON:ABF) Got Enough Cash?

Simply Wall St

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Associated British Foods plc (LON:ABF), a large-cap worth UK£20b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Today I will analyse the latest financial data for ABF to determine is solvency and liquidity and whether the stock is a sound investment.

See our latest analysis for Associated British Foods

ABF’s Debt (And Cash Flows)

ABF has sustained its debt level by about UK£789m over the last 12 months – this includes long-term debt. At this current level of debt, ABF currently has UK£1.2b remaining in cash and short-term investments , ready to be used for running the business. Additionally, ABF has generated UK£1.5b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 196%, signalling that ABF’s debt is appropriately covered by operating cash.

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

With current liabilities at UK£3.0b, it seems that the business has been able to meet these commitments with a current assets level of UK£5.1b, leading to a 1.73x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Food 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.

LSE:ABF Historical Debt, May 31st 2019

Is ABF’s debt level acceptable?

What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. With debt at 8.6% of equity, ABF may be thought of as having low leverage. This range is considered safe as ABF is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether ABF is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For ABF, the ratio of 40.19x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as ABF is a safe investment.

Next Steps:

ABF has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. This is only a rough assessment of financial health, and I'm sure ABF has company-specific issues impacting its capital structure decisions. I recommend you continue to research Associated British Foods to get a better picture of the stock by looking at:

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

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 editorial-team@simplywallst.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.