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Does Archer-Daniels-Midland Company's (NYSE:ADM) Debt Level Pose A Problem?

Simply Wall St

Archer-Daniels-Midland Company (NYSE:ADM), a large-cap worth US$23b, comes to mind for investors seeking a strong and reliable stock investment. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the key to extending previous success is in the health of the company’s financials. I will provide an overview of Archer-Daniels-Midland’s financial liquidity and leverage to give you an idea of Archer-Daniels-Midland’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 ADM here.

Check out our latest analysis for Archer-Daniels-Midland

Does ADM Produce Much Cash Relative To Its Debt?

ADM's debt levels surged from US$7.5b to US$8.4b over the last 12 months , which includes long-term debt. With this growth in debt, ADM's cash and short-term investments stands at US$2.0b to keep the business going. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of ADM’s operating efficiency ratios such as ROA here.

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

Looking at ADM’s US$12b in current 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 1.75x. The current ratio is the number you get when you divide current assets by current liabilities. For Food companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:ADM Historical Debt, April 26th 2019

Can ADM service its debt comfortably?

With debt reaching 44% of equity, ADM may be thought of as relatively highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times ADM’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For ADM, the ratio of 9.52x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like ADM are considered a risk-averse investment.

Next Steps:

At its current level of cash flow coverage, ADM has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. Keep in mind I haven't considered other factors such as how ADM has been performing in the past. I recommend you continue to research Archer-Daniels-Midland to get a more holistic view of the stock by looking at:

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

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 editorial-team@simplywallst.com. 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.