Are General Mills Inc’s (NYSE:GIS) Interest Costs Too High?
Investors pursuing a solid, dependable stock investment can often be led to General Mills Inc (NYSE:GIS), a large-cap worth US$27.28b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, its financial health remains the key to continued success. Today we will look at General Mills’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into GIS here. View out our latest analysis for General Mills
How does GIS’s operating cash flow stack up against its debt?
GIS has built up its total debt levels in the last twelve months, from US$8.43b to US$0 – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$766.10m for investing into the business. Moreover, GIS has produced US$2.31b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 24.40%, signalling that GIS’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GIS’s case, it is able to generate 0.24x cash from its debt capital.
Can GIS pay its short-term liabilities?
At the current liabilities level of US$5.33b liabilities, the company has not been able to meet these commitments with a current assets level of US$4.06b, leading to a 0.76x current account ratio. which is under the appropriate industry ratio of 3x.
Is GIS’s debt level acceptable?
With total debt exceeding equities, General Mills is considered a highly levered company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can check to see whether GIS is able to meet its debt obligations by looking at the net interest coverage ratio. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For GIS, the ratio of 8.56x suggests that interest is appropriately covered. Large-cap investments like GIS are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
GIS’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven’t considered other factors such as how GIS has been performing in the past. I suggest you continue to research General Mills to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for GIS’s future growth? Take a look at our free research report of analyst consensus for GIS’s outlook.
Valuation: What is GIS 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 GIS 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.
