Stocks with market capitalization between $2B and $10B, such as Cal-Maine Foods Inc (NASDAQ:CALM) with a size of USD $2.30B, do not attract as much attention from the investing community as do the small-caps and large-caps. 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. I recommend you look at the following hurdles to assess CALM’s financial health. Check out our latest analysis for Cal-Maine Foods
Is CALM’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For CALM, the debt-to-equity ratio is 1.17%, which indicates that the company faces low risk associated with debt. We can test if CALM’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. CALM’s interest on debt is sufficiently covered by earnings as it sits at around 10.47x. Debtors may be willing to loan the company more money, giving CALM ample headroom to grow its debt facilities.
Can CALM meet its short-term obligations with the cash in hand?
Another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. In order to measure liquidity, we must compare CALM’s current assets with its upcoming liabilities. Our analysis shows that CALM does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Are you a shareholder? CALM’s low debt is also met with low coverage. Investors should ask themselves if they believe CALM still has room for improvement in terms of its operating efficiency given cash flow currently covers less than a quarter of its borrowings. Given that CALM’s financial situation may change, I encourage exploring market expectations for CALM’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. CALM’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.