Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as TreeHouse Foods Inc (NYSE:THS), with a market cap of US$3.02b, often get neglected by retail investors. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at THS’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into THS here. See our latest analysis for TreeHouse Foods
Does THS produce enough cash relative to debt?
THS has shrunken its total debt levels in the last twelve months, from US$2.79b to US$2.55b , which comprises of short- and long-term debt. With this debt payback, THS’s cash and short-term investments stands at US$158.80m for investing into the business. On top of this, THS has produced cash from operations of US$506.00m over the same time period, leading to an operating cash to total debt ratio of 19.88%, signalling that THS’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In THS’s case, it is able to generate 0.2x cash from its debt capital.
Can THS meet its short-term obligations with the cash in hand?
Looking at THS’s most recent US$599.80m liabilities, the company has been able to meet these commitments with a current assets level of US$1.48b, leading to a 2.48x current account ratio. Generally, for Food companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is THS’s debt level acceptable?
THS is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since THS is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
At its current level of cash flow coverage, THS has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how THS has been performing in the past. I suggest you continue to research TreeHouse Foods to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for THS’s future growth? Take a look at our free research report of analyst consensus for THS’s outlook.
- Valuation: What is THS 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 THS 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.
To help readers see pass 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.