Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as HollyFrontier Corporation (NYSE:HFC) with a market-capitalization of US$9.3b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine HFC’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into HFC here.
How much cash does HFC generate through its operations?
HFC has built up its total debt levels in the last twelve months, from US$2.2b to US$2.4b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$1.1b , ready to deploy into the business. Additionally, HFC has generated cash from operations of US$1.3b in the last twelve months, leading to an operating cash to total debt ratio of 54%, signalling that HFC’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HFC’s case, it is able to generate 0.54x cash from its debt capital.
Can HFC meet its short-term obligations with the cash in hand?
Looking at HFC’s US$1.5b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$3.9b, leading to a 2.5x current account ratio. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does HFC face the risk of succumbing to its debt-load?
With debt at 37% of equity, HFC may be thought of as appropriately levered. HFC is not taking on too much debt commitment, which may be constraining for future growth. We can test if HFC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HFC, the ratio of 15.18x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as HFC’s high interest coverage is seen as responsible and safe practice.
HFC’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure HFC has company-specific issues impacting its capital structure decisions. You should continue to research HollyFrontier to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HFC’s future growth? Take a look at our free research report of analyst consensus for HFC’s outlook.
- Valuation: What is HFC 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 HFC 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.