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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like CF Industries Holdings, Inc. (NYSE:CF), with a market cap of US$8.8b, are often out of the spotlight. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. CF’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into CF here.
Does CF Produce Much Cash Relative To Its Debt?
Over the past year, CF has ramped up its debt from US$4.7b to US$5.0b – this includes long-term debt. With this rise in debt, CF's cash and short-term investments stands at US$671m to keep the business going. Additionally, CF has generated US$1.5b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 30%, indicating that CF’s operating cash is sufficient to cover its debt.
Does CF’s liquid assets cover its short-term commitments?
Looking at CF’s US$826m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$1.4b, leading to a 1.71x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CF face the risk of succumbing to its debt-load?
With debt reaching 88% of equity, CF may be thought of as relatively highly levered. 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 3.22x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CF ample headroom to grow its debt facilities.
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. This is only a rough assessment of financial health, and I'm sure CF has company-specific issues impacting its capital structure decisions. I recommend you continue to research CF Industries Holdings to get a better picture of the mid-cap 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.
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 firstname.lastname@example.org. 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.