Investors pursuing a solid, dependable stock investment can often be led to CF Industries Holdings Inc (NYSE:CF), a large-cap worth US$11.8b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the health of the financials determines whether the company continues to succeed. This article will examine CF Industries Holdings’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 CF here.
How much cash does CF generate through its operations?
CF has shrunken its total debt levels in the last twelve months, from US$5.8b to US$4.7b , which is made up of current and long term debt. With this debt payback, CF currently has US$728m remaining in cash and short-term investments for investing into the business. Additionally, CF has generated US$1.0b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 22%, meaning that CF’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 CF’s case, it is able to generate 0.22x cash from its debt capital.
Can CF meet its short-term obligations with the cash in hand?
Looking at CF’s most recent US$482m liabilities, the company has been able to meet these commitments with a current assets level of US$1.3b, leading to a 2.8x current account ratio. For Chemicals 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.
Does CF face the risk of succumbing to its debt-load?
With debt reaching 74% of equity, CF may be thought of as relatively highly levered. 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. Accordingly, large companies often have lower cost of capital due to easily obtained 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. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CF’s case, the ratio of 1.77x suggests that interest is not strongly covered. Given the sheer size of CF Industries Holdings, it’s unlikely to default on interest payments and enter bankruptcy. However, compared to an amply profitable large-cap peer, debtors may see more risk in lending to CF.
CF’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, 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 CF has company-specific issues impacting its capital structure decisions. I suggest you continue to research CF Industries Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CF’s future growth? Take a look at our free research report of analyst consensus for CF’s outlook.
- Valuation: What is CF 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 CF 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 firstname.lastname@example.org.