Altra Industrial Motion Corp. (NASDAQ:AIMC) is a small-cap stock with a market capitalization of US$2.2b. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into AIMC here.
AIMC’s Debt (And Cash Flows)
Over the past year, AIMC has ramped up its debt from US$296m to US$1.7b , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$169m , ready to be used for running the business. Moreover, AIMC has produced cash from operations of US$116m in the last twelve months, resulting in an operating cash to total debt ratio of 6.7%, meaning that AIMC’s operating cash is less than its debt.
Does AIMC’s liquid assets cover its short-term commitments?
Looking at AIMC’s US$337m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$704m, leading to a 2.09x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Machinery companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can AIMC service its debt comfortably?
AIMC is a relatively highly levered company with a debt-to-equity of 93%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether AIMC 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 AIMC's, case, the ratio of 4.94x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AIMC ample headroom to grow its debt facilities.
Although AIMC’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. Since there is also no concerns around AIMC's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure AIMC has company-specific issues impacting its capital structure decisions. You should continue to research Altra Industrial Motion to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AIMC’s future growth? Take a look at our free research report of analyst consensus for AIMC’s outlook.
- Valuation: What is AIMC 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 AIMC 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.
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