Stocks with market capitalization between $2B and $10B, such as Flowers Foods Inc (NYSE:FLO) with a size of US$4.1b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. FLO’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 Flowers Foods’s financial health, so you should conduct further analysis into FLO here.
How does FLO’s operating cash flow stack up against its debt?
Over the past year, FLO has maintained its debt levels at around US$835m made up of current and long term debt. At this constant level of debt, FLO currently has US$30m remaining in cash and short-term investments , ready to deploy into the business. Moreover, FLO has produced cash from operations of US$273m in the last twelve months, leading to an operating cash to total debt ratio of 33%, signalling that FLO’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FLO’s case, it is able to generate 0.33x cash from its debt capital.
Can FLO meet its short-term obligations with the cash in hand?
With current liabilities at US$411m, the company has been able to meet these obligations given the level of current assets of US$571m, with a current ratio of 1.39x. Usually, for Food 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.
Does FLO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 64%, FLO can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In FLO’s case, the ratio of 29.89x suggests that interest is comfortably 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.
Although FLO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for FLO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Flowers Foods to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FLO’s future growth? Take a look at our free research report of analyst consensus for FLO’s outlook.
- Valuation: What is FLO 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 FLO 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 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 firstname.lastname@example.org.