Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Cabot Corporation (NYSE:CBT), with a market cap of US$3.3b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at CBT’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Cabot’s financial health, so you should conduct further analysis into CBT here.
How much cash does CBT generate through its operations?
Over the past year, CBT has ramped up its debt from US$950m to US$1.0b , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$131m , ready to deploy into the business. Additionally, CBT has produced cash from operations of US$292m over the same time period, resulting in an operating cash to total debt ratio of 29%, signalling that CBT’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In CBT’s case, it is able to generate 0.29x cash from its debt capital.
Does CBT’s liquid assets cover its short-term commitments?
With current liabilities at US$890m, it appears that the company has been able to meet these obligations given the level of current assets of US$1.3b, with a current ratio of 1.51x. Generally, for Chemicals companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is CBT’s debt level acceptable?
CBT is a relatively highly levered company with a debt-to-equity of 78%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since CBT is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although CBT’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 CBT’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 CBT has been performing in the past. You should continue to research Cabot to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CBT’s future growth? Take a look at our free research report of analyst consensus for CBT’s outlook.
- Valuation: What is CBT 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 CBT 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.
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 email@example.com.