Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as International Flavors & Fragrances Inc (NYSE:IFF) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to their continued success lies in its financial health. Today we will look at International Flavors & Fragrances’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into IFF here.

Check out our latest analysis for International Flavors & Fragrances

How does IFF’s operating cash flow stack up against its debt?

Over the past year, IFF has reduced its debt from US$1.89b to US$1.75b – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$322.4m , ready to deploy into the business. Moreover, IFF has produced US$388.0m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 22.1%, meaning that IFF’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In IFF’s case, it is able to generate 0.22x cash from its debt capital.

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

At the current liabilities level of US$699.4m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.9x. Generally, for Chemicals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Is IFF’s debt level acceptable?

With debt reaching 99.8% of equity, IFF may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. 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. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In IFF’s case, the ratio of 6.42x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes IFF and other large-cap investments thought to be safe.

Next Steps:

At its current level of cash flow coverage, IFF has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure IFF has company-specific issues impacting its capital structure decisions. I recommend you continue to research International Flavors & Fragrances to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for IFF’s future growth? Take a look at our free research report of analyst consensus for IFF’s outlook.

2. Valuation: What is IFF 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 IFF is currently mispriced by the market.

3. 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.