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Is Huntsman Corporation's (NYSE:HUN) Balance Sheet A Threat To Its Future?

Simply Wall St

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Stocks with market capitalization between $2B and $10B, such as Huntsman Corporation (NYSE:HUN) with a size of US$4.6b, 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. HUN’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into HUN here.

View our latest analysis for Huntsman

Does HUN Produce Much Cash Relative To Its Debt?

HUN's debt levels surged from US$2.3b to US$3.1b over the last 12 months , which includes long-term debt. With this increase in debt, HUN currently has US$444m remaining in cash and short-term investments , ready to be used for running the business. Additionally, HUN has produced cash from operations of US$775m during the same period of time, resulting in an operating cash to total debt ratio of 25%, meaning that HUN’s current level of operating cash is high enough to cover debt.

Does HUN’s liquid assets cover its short-term commitments?

Looking at HUN’s US$1.7b in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$3.1b, with a current ratio of 1.83x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:HUN Historical Debt, June 24th 2019

Can HUN service its debt comfortably?

With a debt-to-equity ratio of 91%, HUN can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 HUN's case, the ratio of 7.5x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving HUN ample headroom to grow its debt facilities.

Next Steps:

Although HUN’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. Since there is also no concerns around HUN's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how HUN has been performing in the past. You should continue to research Huntsman to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for HUN’s future growth? Take a look at our free research report of analyst consensus for HUN’s outlook.
  2. Valuation: What is HUN 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 HUN is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.