Mid-caps stocks, like Croda International Plc (LON:CRDA) with a market capitalization of UK£6.9b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at CRDA’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Croda International’s financial health, so you should conduct further analysis into CRDA here.
Does CRDA produce enough cash relative to debt?
Over the past year, CRDA has ramped up its debt from UK£429m to UK£466m , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at UK£73m for investing into the business. On top of this, CRDA has generated cash from operations of UK£269m in the last twelve months, leading to an operating cash to total debt ratio of 58%, indicating that CRDA’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CRDA’s case, it is able to generate 0.58x cash from its debt capital.
Does CRDA’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£287m 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 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.
Is CRDA’s debt level acceptable?
CRDA is a relatively highly levered company with a debt-to-equity of 51%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if CRDA’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CRDA, the ratio of 45.53x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving CRDA ample headroom to grow its debt facilities.
CRDA’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. Since there is also no concerns around CRDA’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for CRDA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Croda International to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CRDA’s future growth? Take a look at our free research report of analyst consensus for CRDA’s outlook.
- Valuation: What is CRDA 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 CRDA 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.