Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Arrow Electronics, Inc. (NYSE:ARW), with a market cap of US$5.6b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at ARW’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into ARW here.
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ARW’s Debt (And Cash Flows)
Over the past year, ARW has ramped up its debt from US$3.6b to US$4.1b , which accounts for long term debt. With this increase in debt, ARW currently has US$352m remaining in cash and short-term investments , ready to be used for running the business. On top of this, ARW has generated US$19m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 0.5%, meaning that ARW’s current level of operating cash is not high enough to cover debt.
Does ARW’s liquid assets cover its short-term commitments?
With current liabilities at US$7.0b, the company has been able to meet these obligations given the level of current assets of US$12b, with a current ratio of 1.74x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Electronic companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is ARW’s debt level acceptable?
With a debt-to-equity ratio of 74%, ARW can be considered as an above-average leveraged company. This is not unusual for mid-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 ARW's case, the ratio of 5.39x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ARW ample headroom to grow its debt facilities.
ARW’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 ARW has been performing in the past. I suggest you continue to research Arrow Electronics to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARW’s future growth? Take a look at our free research report of analyst consensus for ARW’s outlook.
- Valuation: What is ARW 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 ARW 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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