Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Flowers Foods, Inc. (NYSE:FLO), with a market cap of US$4.5b, often get neglected by retail investors. 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 FLO’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into FLO here.
Does FLO Produce Much Cash Relative To Its Debt?
FLO's debt levels surged from US$838m to US$1.0b over the last 12 months – this includes long-term debt. With this growth in debt, FLO currently has US$25m remaining in cash and short-term investments , ready to be used for running the business. Moreover, FLO has produced cash from operations of US$296m in the last twelve months, leading to an operating cash to total debt ratio of 29%, signalling that FLO’s debt is appropriately covered by operating cash.
Can FLO pay its short-term liabilities?
With current liabilities at US$400m, it seems that the business has been able to meet these obligations given the level of current assets of US$544m, with a current ratio of 1.36x. The current ratio is the number you get when you divide current assets by current liabilities. For Food companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is FLO’s debt level acceptable?
With a debt-to-equity ratio of 80%, FLO can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether FLO 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 FLO's, case, the ratio of 34.02x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FLO ample headroom to grow its debt facilities.
FLO’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. Since there is also no concerns around FLO's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for FLO's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Flowers Foods to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FLO’s future growth? Take a look at our free research report of analyst consensus for FLO’s outlook.
- Valuation: What is FLO 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 FLO 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.