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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as FMC Corporation (NYSE:FMC) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, its financial health remains the key to continued success. I will provide an overview of FMC’s financial liquidity and leverage to give you an idea of FMC’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into FMC here.
FMC’s Debt (And Cash Flows)
FMC has sustained its debt level by about US$3.4b over the last 12 months including long-term debt. At this current level of debt, FMC's cash and short-term investments stands at US$110m , ready to be used for running the business. On top of this, FMC has produced US$170m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 5.1%, signalling that FMC’s operating cash is less than its debt.
Does FMC’s liquid assets cover its short-term commitments?
At the current liabilities level of US$3.3b, the company has been able to meet these commitments with a current assets level of US$4.2b, leading to a 1.26x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals 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.
Does FMC face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, FMC is considered to have high leverage. 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 lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. 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. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In FMC's case, the ratio of 8.58x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as FMC is a safe investment.
At its current level of cash flow coverage, FMC has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure FMC has company-specific issues impacting its capital structure decisions. I recommend you continue to research FMC to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FMC’s future growth? Take a look at our free research report of analyst consensus for FMC’s outlook.
- Valuation: What is FMC 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 FMC 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.