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Are Finning International Inc’s (TSE:FTT) Interest Costs Too High?

Stocks with market capitalization between $2B and $10B, such as Finning International Inc (TSE:FTT) with a size of CA$5.42b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine FTT’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into FTT here.

Check out our latest analysis for Finning International

How much cash does FTT generate through its operations?

FTT’s debt level has been constant at around CA$1.54b over the previous year made up of current and long term debt. At this current level of debt, FTT currently has CA$300.0m remaining in cash and short-term investments for investing into the business. Additionally, FTT has produced CA$229.0m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 14.8%, meaning that FTT’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FTT’s case, it is able to generate 0.15x cash from its debt capital.

Does FTT’s liquid assets cover its short-term commitments?

With current liabilities at CA$1.74b, it appears that the company has been able to meet these obligations given the level of current assets of CA$3.76b, with a current ratio of 2.16x. Usually, for Trade Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

TSX:FTT Historical Debt September 27th 18

Does FTT face the risk of succumbing to its debt-load?

FTT is a relatively highly levered company with a debt-to-equity of 72.8%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether FTT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In FTT’s, case, the ratio of 6.46x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

FTT’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, 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 FTT has been performing in the past. I suggest you continue to research Finning International to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for FTT’s future growth? Take a look at our free research report of analyst consensus for FTT’s outlook.
  2. Valuation: What is FTT 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 FTT is currently mispriced by the market.
  3. 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.