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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Graphic Packaging Holding Company (NYSE:GPK), with a market capitalization of US$3.7b, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at GPK’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into GPK here.
GPK’s Debt (And Cash Flows)
GPK has built up its total debt levels in the last twelve months, from US$2.3b to US$3.0b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$71m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of GPK’s operating efficiency ratios such as ROA here.
Does GPK’s liquid assets cover its short-term commitments?
With current liabilities at US$1.2b, it seems that the business has been able to meet these obligations given the level of current assets of US$1.8b, with a current ratio of 1.5x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Packaging companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is GPK’s debt level acceptable?
With total debt exceeding equity, GPK 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. 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 GPK’s case, the ratio of 3.96x 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.
Although GPK’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 GPK’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Graphic Packaging Holding to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GPK’s future growth? Take a look at our free research report of analyst consensus for GPK’s outlook.
- Valuation: What is GPK 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 GPK 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.