Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Sonoco Products Company (NYSE:SON) with a market-capitalization of US$5.3b, rarely draw their attention. 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 SON’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SON here.
How much cash does SON generate through its operations?
SON has built up its total debt levels in the last twelve months, from US$1.3b to US$1.5b , which comprises of short- and long-term debt. With this rise in debt, SON’s cash and short-term investments stands at US$198m , ready to deploy into the business. Additionally, SON has generated US$497m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 34%, 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 0.34x cash from its debt capital.
Can SON meet its short-term obligations with the cash in hand?
Looking at SON’s most recent US$1.0b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 1.53x. Generally, for Packaging companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can SON service its debt comfortably?
With debt reaching 81% of equity, SON may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SON’s case, the ratio of 8.1x 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.
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. Since there is also no concerns around SON’s liquidity needs, this may be its optimal capital structure for the time being. 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 more holistic view of the mid-cap by looking at:
- 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.
- 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.
- 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.