Yahoo Finance What You Must Know About Norbord Inc.'s (TSE:OSB) Financial Strength
Stocks with market capitalization between $2B and $10B, such as Norbord Inc. (TSE:OSB) with a size of CA$2.7b, do not attract as much attention from the investing community as do the small-caps and large-caps. 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. OSB’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 OSB here.
View our latest analysis for Norbord
Does OSB Produce Much Cash Relative To Its Debt?
OSB has sustained its debt level by about US$550m over the last 12 months – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$128m to keep the business going. Additionally, OSB has produced cash from operations of US$608m over the same time period, leading to an operating cash to total debt ratio of 111%, signalling that OSB’s debt is appropriately covered by operating cash.
Can OSB pay its short-term liabilities?
With current liabilities at US$363m, the company has been able to meet these commitments with a current assets level of US$509m, leading to a 1.4x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Forestry 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.
Can OSB service its debt comfortably?
With debt reaching 67% of equity, OSB may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether OSB is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In OSB's, case, the ratio of 18.87x 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.
Next Steps:
OSB’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for OSB's financial health. Other important fundamentals need to be considered alongside. You should continue to research Norbord to get a better picture of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for OSB’s future growth? Take a look at our free research report of analyst consensus for OSB’s outlook.
Valuation: What is OSB 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 OSB 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.
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