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Maple Leaf Foods Inc. (TSE:MFI): Financial Strength Analysis

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Stocks with market capitalization between $2B and $10B, such as Maple Leaf Foods Inc. (TSE:MFI) with a size of CA$3.8b, do not attract as much attention from the investing community as do the small-caps and large-caps. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine MFI’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Maple Leaf Foods's financial health, so you should conduct further analysis into MFI here.

View our latest analysis for Maple Leaf Foods

MFI’s Debt (And Cash Flows)

MFI has built up its total debt levels in the last twelve months, from CA$61m to CA$715m , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CA$82m to keep the business going. On top of this, MFI has generated CA$286m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 40%, meaning that MFI’s operating cash is sufficient to cover its debt.

Does MFI’s liquid assets cover its short-term commitments?

With current liabilities at CA$607m, it appears that the company has been able to meet these obligations given the level of current assets of CA$846m, with a current ratio of 1.39x. The current ratio is the number you get when you divide current assets by current liabilities. For Food companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

TSX:MFI Historical Debt, June 11th 2019
TSX:MFI Historical Debt, June 11th 2019

Is MFI’s debt level acceptable?

With a debt-to-equity ratio of 23%, MFI's debt level may be seen as prudent. This range is considered safe as MFI is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if MFI’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 MFI, the ratio of 15.58x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MFI ample headroom to grow its debt facilities.

Next Steps:

MFI’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how MFI has been performing in the past. I suggest you continue to research Maple Leaf Foods to get a more holistic view of the stock by looking at:

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  1. Valuation: What is MFI 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 MFI is currently mispriced by the market.

  2. Historical Performance: What has MFI's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.