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Stocks with market capitalization between $2B and $10B, such as Olin Corporation (NYSE:OLN) with a size of US$3.9b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine OLN’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 OLN here.
OLN’s Debt (And Cash Flows)
OLN has shrunk its total debt levels in the last twelve months, from US$3.6b to US$3.3b , which also accounts for long term debt. With this reduction in debt, OLN's cash and short-term investments stands at US$184m to keep the business going. Additionally, OLN has generated cash from operations of US$908m during the same period of time, leading to an operating cash to total debt ratio of 28%, signalling that OLN’s debt is appropriately covered by operating cash.
Can OLN pay its short-term liabilities?
With current liabilities at US$1.1b, it appears that the company has been able to meet these obligations given the level of current assets of US$1.7b, with a current ratio of 1.53x. The current ratio is the number you get when you divide current assets by current liabilities. 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.
Does OLN face the risk of succumbing to its debt-load?
Since total debt growth have outpaced equity growth, OLN 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 test if OLN’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 OLN, the ratio of 2.5x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although OLN’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for OLN's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Olin to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OLN’s future growth? Take a look at our free research report of analyst consensus for OLN’s outlook.
- Valuation: What is OLN 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 OLN 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.