Stocks with market capitalization between $2B and $10B, such as Owens Corning (NYSE:OC) with a size of US$5.2b, do not attract as much attention from the investing community as do the small-caps and large-caps. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at OC’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. Don’t forget that this is a general and concentrated examination of Owens Corning’s financial health, so you should conduct further analysis into OC here.
How does OC’s operating cash flow stack up against its debt?
OC’s debt levels surged from US$2.5b to US$3.7b over the last 12 months – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$136m for investing into the business. Moreover, OC has produced US$828m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 23%, indicating that OC’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In OC’s case, it is able to generate 0.23x cash from its debt capital.
Can OC meet its short-term obligations with the cash in hand?
With current liabilities at US$1.4b, it appears that the company has been able to meet these commitments with a current assets level of US$2.2b, leading to a 1.62x current account ratio. For Building 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 OC service its debt comfortably?
OC is a relatively highly levered company with a debt-to-equity of 87%. 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 OC’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 OC, the ratio of 6.01x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as OC’s high interest coverage is seen as responsible and safe practice.
OC’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for OC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Owens Corning to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OC’s future growth? Take a look at our free research report of analyst consensus for OC’s outlook.
- Valuation: What is OC 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 OC 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.