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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. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. HUN’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into HUN here.
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Does HUN Produce Much Cash Relative To Its Debt?
HUN's debt levels surged from US$2.3b to US$3.1b over the last 12 months , which includes long-term debt. With this increase in debt, HUN currently has US$444m remaining in cash and short-term investments , ready to be used for running the business. Additionally, HUN has produced cash from operations of US$775m during the same period of time, resulting in an operating cash to total debt ratio of 25%, meaning that HUN’s current level of operating cash is high enough to cover 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. 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 HUN service its debt comfortably?
With a debt-to-equity ratio of 91%, HUN can be considered as an above-average leveraged company. 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 debtors may be willing to loan the company more money, giving HUN ample headroom to grow its debt facilities.