Are K+S Aktiengesellschaft’s (FRA:SDF) Interest Costs Too High?
Mid-caps stocks, like K+S Aktiengesellschaft (FRA:SDF) with a market capitalization of €3.3b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. This article will examine SDF’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into SDF here.
See our latest analysis for K+S
Does SDF produce enough cash relative to debt?
SDF’s debt level has been constant at around €3.1b over the previous year comprising of short- and long-term debt. At this stable level of debt, SDF’s cash and short-term investments stands at €357m , ready to deploy into the business. On top of this, SDF has generated €215m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 7.0%, indicating that SDF’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SDF’s case, it is able to generate 0.07x cash from its debt capital.
Does SDF’s liquid assets cover its short-term commitments?
Looking at SDF’s most recent €1.6b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €1.8b, with a current ratio of 1.13x. Usually, for Chemicals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can SDF service its debt comfortably?
With a debt-to-equity ratio of 74%, SDF 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. We can test if SDF’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 SDF, the ratio of 3.42x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SDF’s high interest coverage is seen as responsible and safe practice.
Next Steps:
SDF’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for SDF’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research K+S to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SDF’s future growth? Take a look at our free research report of analyst consensus for SDF’s outlook.
Valuation: What is SDF 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 SDF 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 editorial-team@simplywallst.com.
