The fertilizer business is capital intensive, which sets a high barrier to entry for potential players. Capital expenditure for new projects to add capacity requires huge investment, which a company can either supplement through cash or debt. When we consider Mosaic (MOS), we must also address its leverage position.
Total debt to total assets
The total debt-to-total asset ratio is a measure for assessing leverage. It tells us what percentage of a company’s assets is financed by debt. A high percentage of assets financed by debt means higher financial risk and can be negative for a company.
In the last ten years, Mosaic’s total debt-to-total asset ratio hit a low point of 5.3% in 2011. In 2015, the company’s leverage ratio was 22.2%, higher than its ten-year median of 15.5%. PotashCorp (POT), Agrium (AGU), and Israel Chemicals (ICL) have total debt-to-total asset ratios of 24.2%, and 32.7%, and 38.3%, respectively.
Net debt-to-trailing 12-month EBITDA
Investors must also understand where the company stands in terms of its ability to repay its debt. Net debt-to-trailing 12-month EBITDA (earnings before interest, tax, depreciation, and amortization) is useful in measuring just that. It’s a way of seeing how long a company would take to repay its debt if net debt and EBITDA were to remain constant.
Over the years, Mosaic’s leverage (net debt-to-trailing 12-month EBITDA) ratio has significantly fallen and has also been in negative territory due to the company’s higher cash balance than its debt. Mosaic’s net debt-to-trailing 12-month EBITDA stands at 1.9x.
Mosaic’s EBITDA has risen over 20% since 2008 as the result of a strong crop environment’s leading to higher net sales. PotashCorp has a net debt-to-EBITDA ratio of 1.63x, and Agrium has a net debt-to-EBITDA ratio of 2.5x. Israel Chemicals (ICL) has a leverage ratio of 2.3x.
You can access some of these companies through the VanEck Vectors Agribusiness ETF (MOO), which invests about 32% in the chemical sector.