IFF’s debt standing
At the end of 2Q17, International Flavors and Fragrances (IFF) reported short-term debt inclusive of the current portion of its long-term debt of ~$257.9 million and long-term debt of ~$1.6 billion. Since 2012, IFF’s debt has shown an upward trend.
In 2012, IFF’s total debt was ~$1.0 billion and grew to ~$1.9 billion by the end of 2Q17. During this timeframe, IFF’s debt grew at a CAGR[1. compound annual growth rate] of 14.4%.
IFF’s debt-to-equity ratio
The debt-to-equity ratio is an indication of the extent of debt used by a company to grow its assets. A higher debt-to-equity ratio indicates that a company has used extensive borrowing to finance its growth. However, the cost of debt can hamper its earnings due to high-interest expenses.
At the end of 2Q17, International Flavors and Fragrances’ debt-to-equity ratio was ~1.1x, and its peer Sensient Technologies (SXT) had a debt-to-equity ratio of 0.70x. IFF’s debt-to-equity ratio is also above the industry standard of 0.92x.
IFF’s debt has grown at a CAGR of 14.4% since 2013, and its equity has increased at a slower pace with a CAGR of 6.8% for the same period. This has resulted in the increase in IFF’s debt-to-equity ratio.
Should IFF use its free cash flow to reduce debt?
International Flavors and Fragrances (IFF) has been generating consistent free cash flows and has grown at a CAGR of 20.0% since 2012. The positive free cash flows generated by IFF can be used to repay debt. However, IFF does not currently consider debt repayment as its top priority.
The company has utilized its free cash flows to pay dividends, implement share buybacks, and boost cash balances. At the end of 2Q17, IFF had cash and cash equivalents of ~$491.4 million.
Investors can indirectly hold IFF by investing in the Vanguard Materials ETF (VAW), which invests 1.3% of its portfolio in IFF. The other holdings of the fund include Monsanto (MON), Praxair (PX), and LyondellBasell (LYB), which have respective weights of 6.0%, 4.5%, and 3.9% on September 27, 2017.