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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Alaska Air Group, Inc. (NYSE:ALK), with a market cap of US$7.7b, are often out of the spotlight. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. ALK’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ALK here.
Does ALK Produce Much Cash Relative To Its Debt?
ALK has built up its total debt levels in the last twelve months, from US$2.4b to US$3.7b , which accounts for long term debt. With this growth in debt, ALK's cash and short-term investments stands at US$1.4b to keep the business going. Additionally, ALK has generated cash from operations of US$1.4b over the same time period, resulting in an operating cash to total debt ratio of 37%, meaning that ALK’s current level of operating cash is high enough to cover debt.
Does ALK’s liquid assets cover its short-term commitments?
Looking at ALK’s US$3.4b in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$2.0b, leading to a current ratio of 0.59x. The current ratio is calculated by dividing current assets by current liabilities.
Can ALK service its debt comfortably?
With debt reaching 52% of equity, ALK may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether ALK is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ALK's, case, the ratio of 24.33x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ALK ample headroom to grow its debt facilities.
ALK’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for ALK's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Alaska Air Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALK’s future growth? Take a look at our free research report of analyst consensus for ALK’s outlook.
- Valuation: What is ALK 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 ALK 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 firstname.lastname@example.org. 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.