Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Ansell Limited (ASX:ANN), with a market cap of AU$3.1b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. ANN’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 ANN here.
How does ANN’s operating cash flow stack up against its debt?
ANN’s debt levels have fallen from US$721m to US$552m over the last 12 months , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at US$583m for investing into the business. On top of this, ANN has produced US$154m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 28%, indicating that ANN’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ANN’s case, it is able to generate 0.28x cash from its debt capital.
Does ANN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$300m liabilities, the company has been able to meet these obligations given the level of current assets of US$1.2b, with a current ratio of 3.85x. However, anything above 3x may be considered excessive by some investors. They might argue ANN is leaving too much capital in low-earning investments.
Does ANN face the risk of succumbing to its debt-load?
ANN’s level of debt is appropriate relative to its total equity, at 36%. ANN is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether ANN 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 ANN’s, case, the ratio of 22.99x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ANN ample headroom to grow its debt facilities.
ANN’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure ANN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Ansell to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ANN’s future growth? Take a look at our free research report of analyst consensus for ANN’s outlook.
- Valuation: What is ANN 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 ANN 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.