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Has ASOS Plc (LON:ASC) Got Enough Cash?

Simply Wall St

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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as ASOS Plc (LON:ASC), with a market capitalization of UK£2.6b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at ASC’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into ASC here.

View our latest analysis for ASOS

Is ASC’s debt level acceptable?

Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. The good news for investors is that ASOS 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 ASC, and the company has plenty of headroom and ability to raise debt should it need to in the future.

AIM:ASC Historical Debt, April 8th 2019

Can ASC meet its short-term obligations with the cash in hand?

Given zero long-term debt on its balance sheet, ASOS has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of UK£558m, it appears that the company may not be able to easily meet these obligations given the level of current assets of UK£504m, with a current ratio of 0.9x. The current ratio is calculated by dividing current assets by current liabilities.

Next Steps:

Although ASC has no debt on its balance sheet, it still has short term liabilities such as salaries to pay. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, especially if meeting short-term obligations lead to more pressing issues. I admit this is a fairly basic analysis for ASC's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research ASOS to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ASC’s future growth? Take a look at our free research report of analyst consensus for ASC’s outlook.
  2. Valuation: What is ASC 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 ASC is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.