Mid-caps stocks, like Stepan Company ( NYSE:SCL ) with a market capitalization of US$2.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine SCL’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 Stepan's financial health, so you should conduct further analysis into SCL here .
Does SCL Produce Much Cash Relative To Its Debt?
SCL has shrunk its total debt levels in the last twelve months, from US$291m to US$276m , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$300m , ready to be used for running the business. On top of this, SCL has generated US$171m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 62%, signalling that SCL’s debt is appropriately covered by operating cash.
Can SCL meet its short-term obligations with the cash in hand?
With current liabilities at US$339m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.37x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SCL service its debt comfortably?
SCL’s level of debt is appropriate relative to its total equity, at 35%. SCL is not taking on too much debt commitment, which may be constraining for future growth. We can test if SCL’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 SCL, the ratio of 14.15x 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.
SCL’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. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure SCL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Stepan to get a better picture of the stock by looking at:
- Valuation : What is SCL 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 SCL is currently mispriced by the market.
- Historical Performance : What has SCL'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.
- 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 email@example.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.