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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$6.1b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at SON’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Sonoco Products’s financial health, so you should conduct further analysis into SON here.
Does SON Produce Much Cash Relative To Its Debt?
Over the past year, SON has ramped up its debt from US$1.5b to US$1.8b – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$96m to keep the business going. On top of this, SON has produced cash from operations of US$379m in the last twelve months, leading to an operating cash to total debt ratio of 21%, meaning that SON’s current level of operating cash is high enough to cover debt.
Can SON pay its short-term liabilities?
With current liabilities at US$1.3b, the company has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 1.24x. The current ratio is calculated by dividing current assets by current liabilities. For Packaging 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 SON service its debt comfortably?
SON is a relatively highly levered company with a debt-to-equity of 80%. 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 SON’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 SON, the ratio of 8.24x suggests that interest is appropriately 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.
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. I admit this is a fairly basic analysis for SON's financial health. Other important fundamentals need to be considered alongside. 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.
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.