Is Altra Industrial Motion Corp’s (NASDAQ:AIMC) Balance Sheet Strong Enough To Weather A Storm?
While small-cap stocks, such as Altra Industrial Motion Corp (NASDAQ:AIMC) with its market cap of US$1.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into AIMC here.
How does AIMC’s operating cash flow stack up against its debt?
Over the past year, AIMC has reduced its debt from US$325m to US$277m , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$38m , ready to deploy into the business. On top of this, AIMC has produced cash from operations of US$84m over the same time period, resulting in an operating cash to total debt ratio of 30%, signalling that AIMC’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 AIMC’s case, it is able to generate 0.3x cash from its debt capital.
Can AIMC meet its short-term obligations with the cash in hand?
With current liabilities at US$139m, the company has been able to meet these commitments with a current assets level of US$358m, leading to a 2.58x current account ratio. 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.
Does AIMC face the risk of succumbing to its debt-load?
AIMC is a relatively highly levered company with a debt-to-equity of 67%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In AIMC’s case, the ratio of 12.01x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as AIMC’s high interest coverage is seen as responsible and safe practice.
Next Steps:
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. I admit this is a fairly basic analysis for AIMC’s financial health. Other important fundamentals need to be considered alongside. I suggest you 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.
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 editorial-team@simplywallst.com.
