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Stocks with market capitalization between $2B and $10B, such as Huntsman Corporation (NYSE:HUN) with a size of US$4.6b, do not attract as much attention from the investing community as do the small-caps and large-caps. 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 HUN’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 HUN here.
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HUN’s Debt (And Cash Flows)
Over the past year, HUN has ramped up its debt from US$2.3b to US$3.1b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$444m , ready to be used for running the business. Additionally, HUN has generated cash from operations of US$775m during the same period of time, resulting in an operating cash to total debt ratio of 25%, signalling that HUN’s operating cash is sufficient to cover its debt.
Does HUN’s liquid assets cover its short-term commitments?
Looking at HUN’s US$1.7b in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$3.1b, with a current ratio of 1.83x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Chemicals companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is HUN’s debt level acceptable?
With debt reaching 91% of equity, HUN 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. 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. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In HUN's case, the ratio of 7.5x suggests that interest is appropriately 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.
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Although HUN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure HUN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Huntsman to get a more holistic view of the mid-cap by looking at: