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Is Tate & Lyle plc’s (LON:TATE) Balance Sheet A Threat To Its Future?

Ingrid Hart

Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Tate & Lyle plc (LON:TATE), with a market cap of UK£3.01b, are often out of the spotlight. 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. Let’s take a look at TATE’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into TATE here.

See our latest analysis for Tate & Lyle

How does TATE’s operating cash flow stack up against its debt?

TATE’s debt levels have fallen from UK£692.00m to UK£570.00m over the last 12 months – this includes both the current and long-term debt. With this debt payback, TATE’s cash and short-term investments stands at UK£214.00m , ready to deploy into the business. Moreover, TATE has generated cash from operations of UK£286.00m during the same period of time, leading to an operating cash to total debt ratio of 50.18%, indicating that TATE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TATE’s case, it is able to generate 0.5x cash from its debt capital.

Can TATE pay its short-term liabilities?

At the current liabilities level of UK£402.00m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.31x. Usually, for Food companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

LSE:TATE Historical Debt August 23rd 18

Does TATE face the risk of succumbing to its debt-load?

TATE is a relatively highly levered company with a debt-to-equity of 41.70%. 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 TATE’s case, the ratio of 10.92x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as TATE’s high interest coverage is seen as responsible and safe practice.

Next Steps:

TATE’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 TATE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Tate & Lyle to get a better picture of the mid-cap by looking at:

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