Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Croda International Plc (LON:CRDA), with a market cap of UK£6.4b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine CRDA’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Croda International’s financial health, so you should conduct further analysis into CRDA here.
Does CRDA produce enough cash relative to debt?
CRDA has built up its total debt levels in the last twelve months, from UK£445m to UK£497m , which includes long-term debt. With this increase in debt, CRDA’s cash and short-term investments stands at UK£71m , ready to deploy into the business. Moreover, CRDA has generated cash from operations of UK£262m during the same period of time, leading to an operating cash to total debt ratio of 53%, signalling that CRDA’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CRDA’s case, it is able to generate 0.53x cash from its debt capital.
Does CRDA’s liquid assets cover its short-term commitments?
Looking at CRDA’s UK£292m in current liabilities, the company has been able to meet these commitments with a current assets level of UK£592m, leading to a 2.03x current account ratio. For Chemicals 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.
Can CRDA service its debt comfortably?
With a debt-to-equity ratio of 50%, CRDA can be considered as an above-average leveraged company. 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 CRDA 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 CRDA’s, case, the ratio of 32.29x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving CRDA ample headroom to grow its debt facilities.
CRDA’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 CRDA has been performing in the past. I suggest you continue to research Croda International to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CRDA’s future growth? Take a look at our free research report of analyst consensus for CRDA’s outlook.
- Valuation: What is CRDA 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 CRDA 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 email@example.com. 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.
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