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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like NewMarket Corporation (NYSE:NEU), with a market cap of US$4.6b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. NEU’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 NewMarket’s financial health, so you should conduct further analysis into NEU here.
NEU’s Debt (And Cash Flows)
NEU has built up its total debt levels in the last twelve months, from US$625m to US$850m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$78m to keep the business going. Additionally, NEU has produced US$207m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 24%, meaning that NEU’s debt is appropriately covered by operating cash.
Does NEU’s liquid assets cover its short-term commitments?
Looking at NEU’s US$260m in current liabilities, the company has been able to meet these commitments with a current assets level of US$856m, leading to a 3.29x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Does NEU face the risk of succumbing to its debt-load?
With total debt exceeding equity, 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 test if NEU’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 NEU, the ratio of 10.61x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as NEU’s high interest coverage is seen as responsible and safe practice.
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. Keep in mind I haven't considered other factors such as how NEU has been performing in the past. I suggest you continue to research NewMarket to get a better picture of the mid-cap by looking at:
- 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.
- 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.
- 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.