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Are Chr Hansen Holding A/S’s (CPH:CHR) Interest Costs Too High?

The size of Chr Hansen Holding A/S (CPH:CHR), a ø90.3b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to their continued success lies in its financial health. I will provide an overview of Chr. Hansen Holding’s financial liquidity and leverage to give you an idea of Chr. Hansen Holding’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into CHR here.

See our latest analysis for Chr. Hansen Holding

How does CHR’s operating cash flow stack up against its debt?

CHR’s debt level has been constant at around €728m over the previous year made up of current and long term debt. At this constant level of debt, CHR’s cash and short-term investments stands at €69m , ready to deploy into the business. Moreover, CHR has produced cash from operations of €302m over the same time period, resulting in an operating cash to total debt ratio of 42%, meaning that CHR’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CHR’s case, it is able to generate 0.42x cash from its debt capital.

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

Looking at CHR’s most recent €344m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.2x. 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.

CPSE:CHR Historical Debt November 5th 18

Can CHR service its debt comfortably?

With a debt-to-equity ratio of 94%, CHR can be considered as an above-average leveraged company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can test if CHR’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For CHR, the ratio of 45.04x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as CHR is a safe investment.

Next Steps:

CHR’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure CHR has company-specific issues impacting its capital structure decisions. You should continue to research Chr. Hansen Holding to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CHR’s future growth? Take a look at our free research report of analyst consensus for CHR’s outlook.
  2. Valuation: What is CHR 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 CHR 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.