Yahoo Finance Are Commercial Metals Company’s (NYSE:CMC) Interest Costs Too High?
Mid-caps stocks, like Commercial Metals Company (NYSE:CMC) with a market capitalization of US$2.72b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at CMC’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CMC here. View out our latest analysis for Commercial Metals
How does CMC’s operating cash flow stack up against its debt?
CMC has shrunken its total debt levels in the last twelve months, from US$1.07b to US$824.76m , which is made up of current and long term debt. With this debt repayment, CMC’s cash and short-term investments stands at US$252.60m for investing into the business. Additionally, CMC has generated US$174.47m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 21.15%, meaning that CMC’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CMC’s case, it is able to generate 0.21x cash from its debt capital.
Can CMC meet its short-term obligations with the cash in hand?
At the current liabilities level of US$608.44m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.71b, with a current ratio of 2.82x. Usually, for Metals and Mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is CMC’s debt level acceptable?
With a debt-to-equity ratio of 56.41%, CMC 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 test if CMC’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 CMC, the ratio of 4.14x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CMC ample headroom to grow its debt facilities.
Next Steps:
CMC’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure CMC has company-specific issues impacting its capital structure decisions. I suggest you continue to research Commercial Metals to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CMC’s future growth? Take a look at our free research report of analyst consensus for CMC’s outlook.
Valuation: What is CMC 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 CMC 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.
