With a market capitalization of USD $23.07B, Brown-Forman Corporation (NYSE:BF.B) falls in the category of stocks popularly identified as large-caps. These are established companies that attract investors due to diversified revenue streams and ability to enhance total returns through dividends. However, another important aspect of investing in large caps is its financial health. There are always disruptions which destabilize an existing industry, and although large-caps are hard to knock down, it is useful to understand its level of resilience. These factors make a basic understanding of a company’s financial position of utmost importance for a new investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Check out our latest analysis for Brown-Forman
Is BF.B’s level of debt at an acceptable level?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. For BF.B, the debt-to-equity ratio stands at above 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate. 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 (EBIT) at least three times its interest payments is considered financially sound. In BF.B’s case, its interest is excessively covered by its earnings as the ratio sits at 17.34x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Does BF.B generate enough cash through operations?
A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This is also a test for whether BF.B has the ability to repay its debt with cash from its business, which is less of a concern for large companies. BF.B’s recent operating cash flow was 0.28 times its debt within the past year. A ratio of over a 0.25x is a positive sign and shows that BF.B is generating ample cash from its core business, which should increase its potential to pay back near-term debt.
Next Steps:
Are you a shareholder? BF.B’s high cash coverage means that, although its debt levels are high, investors shouldn’t panic since the company is able to utilise its borrowings efficiently in order to generate cash flow. Since BF.B’s capital structure could change, You should continue exploring market expectations for BF.B’s future growth on our free analysis platform.