How Financially Strong Is FMC Corporation (NYSE:FMC)?

Simply Wall St

Sat, Jun 1, 2019, 7:45 AM

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as FMC Corporation (NYSE:FMC) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, its financial health remains the key to continued success. I will provide an overview of FMC’s financial liquidity and leverage to give you an idea of FMC’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into FMC here.

Check out our latest analysis for FMC

FMC’s Debt (And Cash Flows)

FMC has sustained its debt level by about US$3.4b over the last 12 months including long-term debt. At this current level of debt, FMC's cash and short-term investments stands at US$110m , ready to be used for running the business. On top of this, FMC has produced US$170m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 5.1%, signalling that FMC’s operating cash is less than its debt.

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

At the current liabilities level of US$3.3b, the company has been able to meet these commitments with a current assets level of US$4.2b, leading to a 1.26x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

Does FMC face the risk of succumbing to its debt-load?

Since equity is smaller than total debt levels, FMC is considered to have high leverage. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In FMC's case, the ratio of 8.58x 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 FMC is a safe investment.