Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as The Mosaic Company (NYSE:MOS) with a market-capitalization of USD $8.53B, rarely draw their attention and few analysts cover them. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Mid-caps are found to be more volatile than the large-caps but safer than small-caps, largely due to their weaker balance sheet. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. View our latest analysis for Mosaic
Is MOS’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For MOS, the debt-to-equity ratio is 38.55%, which indicates that its debt is at an acceptable level. 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 MOS’s case, its interest is excessively covered by its earnings as the ratio sits at 3.86x. Lenders may be less hesitant to lend out more funding as MOS’s high interest coverage is seen as responsible and safe practice.
Can MOS meet its short-term obligations with the cash in hand?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. In order to measure liquidity, we must compare MOS’s current assets with its upcoming liabilities. Our analysis shows that MOS does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Next Steps:
Are you a shareholder? MOS’s low debt is also met with low coverage. Investors should ask themselves if they believe MOS still has room for improvement in terms of its operating efficiency given cash flow currently covers less than a quarter of its borrowings. Since MOS’s financial position may differ over time, I suggest assessing market expectations for MOS’s future growth on our free analysis platform.
Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. MOS’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.