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With a market capitalization of US$23b, Hormel Foods Corporation (NYSE:HRL) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there's plenty of stocks available to the public for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Using the most recent data for HRL, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
HRL’s Debt (And Cash Flows)
HRL has shrunk its total debt levels in the last twelve months, from US$880m to US$625m – this includes long-term debt. With this debt payback, HRL currently has US$513m remaining in cash and short-term investments to keep the business going. On top of this, HRL has generated US$1.1b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 180%, indicating that HRL’s debt is appropriately covered by operating cash.
Can HRL pay its short-term liabilities?
With current liabilities at US$1.4b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.46x. The current ratio is the number you get when you divide current assets by current liabilities. For Food 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.
Can HRL service its debt comfortably?
HRL’s level of debt is appropriate relative to its total equity, at 11%. HRL is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether HRL is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For HRL, the ratio of 58.33x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like HRL are considered a risk-averse investment.
HRL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for HRL's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Hormel Foods to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HRL’s future growth? Take a look at our free research report of analyst consensus for HRL’s outlook.
- Valuation: What is HRL 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 HRL 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 email@example.com. 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.