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CF Industries Holdings, Inc. (NYSE:CF), a large-cap worth US$10.0b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to extending previous success is in the health of the company’s financials. Today we will look at CF Industries Holdings’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. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into CF here.
Does CF Produce Much Cash Relative To Its Debt?
Over the past year, CF has ramped up its debt from US$4.7b to US$5.0b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$671m to keep the business going. Moreover, CF has generated cash from operations of US$1.5b in the last twelve months, resulting in an operating cash to total debt ratio of 30%, indicating that CF’s operating cash is sufficient to cover its debt.
Does CF’s liquid assets cover its short-term commitments?
With current liabilities at US$826m, the company has been able to meet these obligations given the level of current assets of US$1.4b, with a current ratio of 1.71x. The current ratio is the number you get when you divide current assets by current liabilities. 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.
Does CF face the risk of succumbing to its debt-load?
CF is a relatively highly levered company with a debt-to-equity of 83%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can assess the sustainability of CF’s debt levels to the test by looking at how well interest payments are covered by earnings. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For CF, the ratio of 3.22x 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 CF are considered a risk-averse investment.
CF’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 CF's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how CF has been performing in the past. I recommend you continue to research CF Industries Holdings to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CF’s future growth? Take a look at our free research report of analyst consensus for CF’s outlook.
- Valuation: What is CF 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 CF 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 firstname.lastname@example.org. 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.