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CF Industries Holdings Inc (NYSE:CF): Time For A Financial Health Check

Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as CF Industries Holdings Inc (NYSE:CF) with a market-capitalization of US$9.8b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine CF’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CF here.

See our latest analysis for CF Industries Holdings

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 also accounts for long term debt. With this debt repayment, CF currently has US$1.0b remaining in cash and short-term investments for investing into the business. On top of this, CF has generated cash from operations of US$1.5b in the last twelve months, leading to an operating cash to total debt ratio of 31%, signalling that CF’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CF’s case, it is able to generate 0.31x cash from its debt capital.

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

At the current liabilities level of US$788m, it appears that the company has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 2.03x. Usually, for Chemicals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:CF Historical Debt November 30th 18

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

CF is a relatively highly levered company with a debt-to-equity of 76%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether CF 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. In CF’s, case, the ratio of 2.59x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CF’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Although CF’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 CF’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 CF has been performing in the past. I recommend you continue to research CF Industries Holdings to get a more holistic view of the mid-cap by looking at:

  1. 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.
  2. 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.
  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.