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Investors are always looking for growth in small-cap stocks like Applied Industrial Technologies, Inc. (NYSE:AIT), with a market cap of US$2.3b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into AIT here.
AIT’s Debt (And Cash Flows)
Over the past year, AIT has reduced its debt from US$1.0b to US$982m , which includes long-term debt. With this debt payback, AIT currently has US$47m remaining in cash and short-term investments to keep the business going. Moreover, AIT has produced US$177m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 18%, indicating that AIT’s operating cash is less than its debt.
Can AIT meet its short-term obligations with the cash in hand?
Looking at AIT’s US$417m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 2.7x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Trade Distributors companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does AIT face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, AIT is a highly leveraged company. 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 AIT 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 AIT's, case, the ratio of 6.56x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
AIT’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 AIT has been performing in the past. I suggest you continue to research Applied Industrial Technologies to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AIT’s future growth? Take a look at our free research report of analyst consensus for AIT’s outlook.
- Valuation: What is AIT 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 AIT 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.