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With a market capitalization of US$48b, Air Products and Chemicals, Inc. (NYSE:APD) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there's plenty of stocks available to the public for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Using the most recent data for APD, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
APD’s Debt (And Cash Flows)
APD has sustained its debt level by about US$3.8b over the last 12 months which accounts for long term debt. At this current level of debt, APD currently has US$2.8b remaining in cash and short-term investments , ready to be used for running the business. Additionally, APD has generated cash from operations of US$2.7b over the same time period, leading to an operating cash to total debt ratio of 72%, indicating that APD’s debt is appropriately covered by operating cash.
Can APD pay its short-term liabilities?
At the current liabilities level of US$2.1b, it appears that the company has been able to meet these obligations given the level of current assets of US$4.9b, with a current ratio of 2.36x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can APD service its debt comfortably?
With a debt-to-equity ratio of 33%, APD's debt level may be seen as prudent. This range is considered safe as APD is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether APD is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For APD, the ratio of 21.17x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like APD are considered a risk-averse investment.
APD has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for APD's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Air Products and Chemicals to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for APD’s future growth? Take a look at our free research report of analyst consensus for APD’s outlook.
- Valuation: What is APD 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 APD is currently mispriced by the market.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.