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Are Vulcan Materials Company’s (NYSE:VMC) Interest Costs Too High?

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Vulcan Materials Company (NYSE:VMC) a safer option. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the health of the financials determines whether the company continues to succeed. Let’s take a look at Vulcan Materials’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into VMC here. View out our latest analysis for Vulcan Materials

How much cash does VMC generate through its operations?

VMC’s debt levels surged from US$1.98b to US$2.85b over the last 12 months , which is made up of current and long term debt. With this increase in debt, VMC’s cash and short-term investments stands at US$141.65m for investing into the business. Additionally, VMC has produced cash from operations of US$644.68m during the same period of time, resulting in an operating cash to total debt ratio of 22.58%, meaning that VMC’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VMC’s case, it is able to generate 0.23x cash from its debt capital.

Does VMC’s liquid assets cover its short-term commitments?

Looking at VMC’s most recent US$442.87m 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 2.66x. For Basic Materials companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:VMC Historical Debt June 21st 18
NYSE:VMC Historical Debt June 21st 18

Is VMC’s debt level acceptable?

VMC is a relatively highly levered company with a debt-to-equity of 60.57%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if VMC’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For VMC, the ratio of 2.22x suggests that interest is not strongly covered. The sheer size of Vulcan Materials means it is unlikely to default or announce bankruptcy anytime soon. However, lenders may be more reluctant to lend out more funding as VMC’s low interest coverage already puts the company in a risky position.

Next Steps:

At its current level of cash flow coverage, VMC has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure VMC has company-specific issues impacting its capital structure decisions. You should continue to research Vulcan Materials to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for VMC’s future growth? Take a look at our free research report of analyst consensus for VMC’s outlook.

  2. Valuation: What is VMC 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 VMC 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.

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