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Mid-caps stocks, like Nomad Foods Limited (NYSE:NOMD) with a market capitalization of US$4.1b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. NOMD’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. Don’t forget that this is a general and concentrated examination of Nomad Foods’s financial health, so you should conduct further analysis into NOMD here.
NOMD’s Debt (And Cash Flows)
NOMD has built up its total debt levels in the last twelve months, from €1.6b to €1.9b , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at €753m to keep the business going. On top of this, NOMD has produced €341m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 18%, signalling that NOMD’s debt is not covered by operating cash.
Can NOMD pay its short-term liabilities?
Looking at NOMD’s €864m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of €1.3b, leading to a 1.54x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Food companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can NOMD service its debt comfortably?
With debt reaching 79% of equity, NOMD 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In NOMD's case, the ratio of 5.92x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NOMD ample headroom to grow its debt facilities.
NOMD’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 NOMD'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 NOMD has company-specific issues impacting its capital structure decisions. I suggest you continue to research Nomad Foods to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NOMD’s future growth? Take a look at our free research report of analyst consensus for NOMD’s outlook.
- Valuation: What is NOMD 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 NOMD 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 email@example.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.