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Mid-caps stocks, like Element Solutions Inc (NYSE:ESI) with a market capitalization of US$2.6b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at ESI’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions 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 ESI here.
ESI’s Debt (And Cash Flows)
ESI's debt levels have fallen from US$5.6b to US$1.7b over the last 12 months , which includes long-term debt. With this debt payback, ESI currently has US$230m remaining in cash and short-term investments , ready to be used for running the business. Additionally, ESI has produced US$4.5m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 0.3%, meaning that ESI’s current level of operating cash is not high enough to cover debt.
Can ESI meet its short-term obligations with the cash in hand?
With current liabilities at US$456m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.2x. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can ESI service its debt comfortably?
ESI is a relatively highly levered company with a debt-to-equity of 73%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since ESI is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
ESI’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure ESI has company-specific issues impacting its capital structure decisions. I recommend you continue to research Element Solutions to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ESI’s future growth? Take a look at our free research report of analyst consensus for ESI’s outlook.
- Valuation: What is ESI 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 ESI 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.