Is Sonoco Products Company’s (NYSE:SON) Balance Sheet A Threat To Its Future?
Mid-caps stocks, like Sonoco Products Company (NYSE:SON) with a market capitalization of $5.37B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. SON’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 Amazon’s financial health, so you should conduct further analysis into SON here. Check out our latest analysis for Sonoco Products
Does SON generate enough cash through operations?
Over the past year, SON has reduced its debt from $1,128.4M to $1,052.7M , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at $257.2M for investing into the business. Additionally, SON has generated $398.7M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 37.87%, indicating that SON’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SON’s case, it is able to generate 0.38x cash from its debt capital.
Does SON’s liquid assets cover its short-term commitments?
Looking at SON’s most recent $802.6M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $1,348.8M, leading to a 1.68x current account ratio. For Packaging companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does SON face the risk of succumbing to its debt-load?
SON is a relatively highly levered company with a debt-to-equity of 81.09%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SON 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 SON’s, case, the ratio of 7.82x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SON ample headroom to grow its debt facilities.
Next Steps:
SON’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. Keep in mind I haven’t considered other factors such as how SON has been performing in the past. I recommend you continue to research Sonoco Products to get a better picture of the mid-cap by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for SON’s future growth? Take a look at our free research report of analyst consensus for SON’s outlook.
2. Valuation: What is SON 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 SON 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.
To help readers see pass 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.
