Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Alliance Resource Partners LP (NASDAQ:ARLP), with a market capitalization of US$2.61b, rarely draw their attention from the investing community. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine ARLP’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ARLP here.
Does ARLP produce enough cash relative to debt?
Over the past year, ARLP has reduced its debt from US$561.0m to US$520.7m , which is made up of current and long term debt. With this debt payback, ARLP’s cash and short-term investments stands at US$51.2m , ready to deploy into the business. On top of this, ARLP has produced US$634.9m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 122%, indicating that ARLP’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ARLP’s case, it is able to generate 1.22x cash from its debt capital.
Can ARLP meet its short-term obligations with the cash in hand?
With current liabilities at US$275.9m, the company has been able to meet these commitments with a current assets level of US$316.2m, leading to a 1.15x current account ratio. For Oil and Gas companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ARLP service its debt comfortably?
ARLP is a relatively highly levered company with a debt-to-equity of 41.5%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether ARLP 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 ARLP’s, case, the ratio of 8.69x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ARLP ample headroom to grow its debt facilities.
Although ARLP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how ARLP has been performing in the past. I recommend you continue to research Alliance Resource Partners to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARLP’s future growth? Take a look at our free research report of analyst consensus for ARLP’s outlook.
- Valuation: What is ARLP 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 ARLP 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.