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Stocks with market capitalization between $2B and $10B, such as Lancaster Colony Corporation (NASDAQ:LANC) with a size of US$4.0b, do not attract as much attention from the investing community as do the small-caps and large-caps. 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. Let’s take a look at LANC’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into LANC here.
Is LANC’s debt level acceptable?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. For LANC, the debt-to-equity ratio is zero, meaning that the company has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with LANC, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can LANC meet its short-term obligations with the cash in hand?
Since Lancaster Colony doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at LANC’s US$109m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$367m, leading to a 3.38x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
LANC has no debt as well as ample cash to cover its short-term commitments. Its safe operations reduces risk for the company and its investors, but some degree of debt may also boost earnings growth and operational efficiency. I admit this is a fairly basic analysis for LANC's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Lancaster Colony to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LANC’s future growth? Take a look at our free research report of analyst consensus for LANC’s outlook.
- Valuation: What is LANC 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 LANC 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.