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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£3.5b, are often out of the spotlight. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. TATE’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TATE here.
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TATE’s Debt (And Cash Flows)
Over the past year, TATE has maintained its debt levels at around UK£597m – this includes long-term debt. At this stable level of debt, TATE currently has UK£290m remaining in cash and short-term investments to keep the business going. Additionally, TATE has generated cash from operations of UK£330m in the last twelve months, resulting in an operating cash to total debt ratio of 55%, meaning that TATE’s current level of operating cash is high enough to cover debt.
Does TATE’s liquid assets cover its short-term commitments?
Looking at TATE’s UK£681m in current 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 1.61x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Food companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is TATE’s debt level acceptable?
With debt reaching 40% of equity, TATE may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if TATE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TATE, the ratio of 11.31x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.