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What does NewMarket Corporation’s (NYSE:NEU) Balance Sheet Tell Us About Its Future?

Mid-caps stocks, like NewMarket Corporation (NYSE:NEU) with a market capitalization of US$4.6b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at NEU’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of NewMarket’s financial health, so you should conduct further analysis into NEU here.

Check out our latest analysis for NewMarket

How much cash does NEU generate through its operations?

NEU’s debt levels surged from US$612m to US$818m over the last 12 months , which accounts for long term debt. With this growth in debt, NEU’s cash and short-term investments stands at US$148m for investing into the business. Additionally, NEU has produced US$166m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 20%, indicating that NEU’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NEU’s case, it is able to generate 0.2x cash from its debt capital.

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

With current liabilities at US$279m, the company has been able to meet these commitments with a current assets level of US$915m, leading to a 3.28x current account ratio. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

NYSE:NEU Historical Debt November 29th 18

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

With total debt exceeding equities, NEU is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether NEU 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 NEU’s, case, the ratio of 12.45x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving NEU ample headroom to grow its debt facilities.

Next Steps:

NEU’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 NEU’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 NEU has company-specific issues impacting its capital structure decisions. You should continue to research NewMarket to get a more holistic view of the mid-cap by looking at:

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