Stocks with market capitalization between $2B and $10B, such as American Eagle Outfitters, Inc. (NYSE:AEO) with a size of US$3.6b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine AEO’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into AEO here.
Can AEO service its debt comfortably?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. Generally, mid-cap stocks are considered financially healthy if its ratio is below 40%. For AEO, the debt-to-equity ratio is zero, meaning that the company has no debt. It has been operating its business with zero debt and utilising only its equity capital. Investors’ risk associated with debt is virtually non-existent with AEO, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can AEO pay its short-term liabilities?
Given zero long-term debt on its balance sheet, American Eagle Outfitters has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of US$607m, the company has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 1.85x. For Specialty Retail companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
AEO has zero-debt as well as ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and its investors, though, some level of debt may also boost earnings growth and operational efficiency. This is only a rough assessment of financial health, and I’m sure AEO has company-specific issues impacting its capital structure decisions. I recommend you continue to research American Eagle Outfitters to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AEO’s future growth? Take a look at our free research report of analyst consensus for AEO’s outlook.
- Valuation: What is AEO 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 AEO 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 email@example.com.