Agricultural fertilizer is a capital-intensive business. Capital expenditures are usually broken into maintenance and expansion costs. Maintenance capital expenditure pertains to costs to maintain the current facilities. High costs of expansion often lead to borrowing funds, so we need to look at leverage for these companies (MOO).
Borrowing can lead to interest costs that a company must be able to cover from its ongoing operations. Net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) tells us how long it will take for a company to pay back its debt if net debt and EBITDA are constant.
A ratio of 1.0x tells us that it will take one year to pay off a company’s debt. Naturally, the lower the ratio, the better.
In 2015, Agrium (AGU) had the highest leverage ratio of 3.0x compared to the average ratio of 1.7x for the companies in our above graph. CF Industries (CF) and Israel Chemicals (ICL) followed with leverages of 2.4x and 2.12x, respectively. PotashCorp (POT) had a leverage of 1.5x, and Mosaic (MOS) followed with a leverage of 1.1x.
CVR Partners (UAN) and Intrepid Potash (IPI) both had leverages below 1.0x, at 0.89x and 0.82x, respectively. A ratio below 1.0x means that it would take less than one year to pay off their debts.
Next, let’s look at return on equity for the above fertilizer companies.