Yahoo Finance Does Monsanto Company’s (NYSE:MON) Debt Level Pose A Problem?
Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Monsanto Company (NYSE:MON) 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. Today we will look at Monsanto’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into MON here. Check out our latest analysis for Monsanto
How does MON’s operating cash flow stack up against its debt?
MON’s debt levels have fallen from US$9.08b to US$8.12b over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, MON currently has US$1.77b remaining in cash and short-term investments for investing into the business. Additionally, MON has generated US$3.23b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 39.71%, signalling that MON’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 MON’s case, it is able to generate 0.4x cash from its debt capital.
Can MON pay its short-term liabilities?
At the current liabilities level of US$6.40b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.35x. Usually, for Chemicals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does MON face the risk of succumbing to its debt-load?
With total debt exceeding equities, Monsanto is considered a highly levered company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. By measuring how many times MON’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MON, the ratio of 9.33x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as MON is a safe investment.
Next Steps:
MON’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. Since there is also no concerns around MON’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure MON has company-specific issues impacting its capital structure decisions. You should continue to research Monsanto to get a better picture of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for MON’s future growth? Take a look at our free research report of analyst consensus for MON’s outlook.
Valuation: What is MON 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 MON 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.
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.
