Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Air Products and Chemicals Inc (NYSE:APD). With a market valuation of US$35b, APD is a safe haven in times of market uncertainty due to its strong balance sheet. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Assessing the most recent data for APD, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
How does APD’s operating cash flow stack up against its debt?
APD’s debt level has been constant at around US$3.8b over the previous year – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$3.0b , ready to deploy into the business. Moreover, APD has generated US$2.5b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 67%, indicating that APD’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In APD’s case, it is able to generate 0.67x cash from its debt capital.
Does APD’s liquid assets cover its short-term commitments?
With current liabilities at US$2.3b, the company has been able to meet these obligations given the level of current assets of US$5.1b, with a current ratio of 2.17x. Usually, for Chemicals companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can APD service its debt comfortably?
APD’s level of debt is appropriate relative to its total equity, at 34%. This range is considered safe as APD is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if APD’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For APD, the ratio of 15.06x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes APD and other large-cap investments thought to be safe.
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. This is only a rough assessment of financial health, and I’m sure APD has company-specific issues impacting its capital structure decisions. I recommend 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.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.