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Is Orkla ASA's (OB:ORK) Liquidity Good Enough?

Simply Wall St

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Mid-caps stocks, like Orkla ASA (OB:ORK) with a market capitalization of øre76b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. 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. ORK’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of Orkla's financial health, so you should conduct further analysis into ORK here.

See our latest analysis for Orkla

ORK’s Debt (And Cash Flows)

ORK has built up its total debt levels in the last twelve months, from øre5.0b to øre7.1b – this includes long-term debt. With this growth in debt, ORK currently has øre1.3b remaining in cash and short-term investments , ready to be used for running the business. Moreover, ORK has generated cash from operations of øre5.3b during the same period of time, resulting in an operating cash to total debt ratio of 75%, signalling that ORK’s debt is appropriately covered by operating cash.

Does ORK’s liquid assets cover its short-term commitments?

With current liabilities at øre10b, it seems that the business has been able to meet these commitments with a current assets level of øre14b, leading to a 1.38x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Food companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

OB:ORK Historical Debt, June 17th 2019

Can ORK service its debt comfortably?

With debt at 16% of equity, ORK may be thought of as appropriately levered. This range is considered safe as ORK is not taking on too much debt obligation, which may be constraining for future growth. We can test if ORK’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 ORK, the ratio of 32.73x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

ORK has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure ORK has company-specific issues impacting its capital structure decisions. I recommend you continue to research Orkla to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ORK’s future growth? Take a look at our free research report of analyst consensus for ORK’s outlook.
  2. Valuation: What is ORK 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 ORK is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.