Are AAR Corp’s (NYSE:AIR) Interest Costs Too High?
AAR Corp (NYSE:AIR) is a small-cap stock with a market capitalization of US$1.47B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into AIR here.
Does AIR generate an acceptable amount of cash through operations?
AIR has built up its total debt levels in the last twelve months, from US$148.10M to US$157.30M , which comprises of short- and long-term debt. With this increase in debt, AIR’s cash and short-term investments stands at US$36.00M , ready to deploy into the business. Moreover, AIR has generated US$21.80M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 13.86%, indicating that AIR’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AIR’s case, it is able to generate 0.14x cash from its debt capital.
Can AIR meet its short-term obligations with the cash in hand?
At the current liabilities level of US$335.10M 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 2.65x. Generally, for Aerospace & Defense companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does AIR face the risk of succumbing to its debt-load?
AIR’s level of debt is appropriate relative to its total equity, at 23.99%. This range is considered safe as AIR is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if AIR’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AIR, the ratio of 9.05x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as AIR’s high interest coverage is seen as responsible and safe practice.
Next Steps:
AIR’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how AIR has been performing in the past. I suggest you continue to research AAR to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.
1. Future Outlook: What are well-informed industry analysts predicting for AIR’s future growth? Take a look at this free research report of analyst consensus for AIR’s outlook.
2. Valuation: What is AIR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in this free research report helps visualize whether AIR is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore a free list of these great stocks here.
To help readers see pass 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.