Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Fortune Brands Home & Security, Inc. (NYSE:FBHS), with a market capitalization of US$7.4b, rarely draw their attention from the investing community. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at FBHS’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into FBHS here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
FBHS’s Debt (And Cash Flows)
FBHS has built up its total debt levels in the last twelve months, from US$1.9b to US$2.7b , which accounts for long term debt. With this growth in debt, FBHS's cash and short-term investments stands at US$281m , ready to be used for running the business. On top of this, FBHS has produced cash from operations of US$566m during the same period of time, resulting in an operating cash to total debt ratio of 21%, indicating that FBHS’s current level of operating cash is high enough to cover debt.
Does FBHS’s liquid assets cover its short-term commitments?
Looking at FBHS’s US$1.2b in current liabilities, the company has been able to meet these obligations given the level of current assets of US$1.8b, with a current ratio of 1.49x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Building companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can FBHS service its debt comfortably?
Since total debt growth have outpaced equity growth, FBHS is a highly leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether FBHS is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In FBHS's, case, the ratio of 8.62x 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 FBHS’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 FBHS's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure FBHS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Fortune Brands Home & Security to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FBHS’s future growth? Take a look at our free research report of analyst consensus for FBHS’s outlook.
- Valuation: What is FBHS 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 FBHS 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.