Mid-caps stocks, like ASOS Plc (LON:ASC) with a market capitalization of UK£4.2b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. ASC’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 ASC here.
Does ASC face the risk of succumbing to its debt-load?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. Generally, mid-cap stocks are considered financially healthy if its ratio is below 40%. For ASC, 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 ASC, and the company has plenty of headroom and ability to raise debt should it need to in the future.
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. With current liabilities at UK£476m, the company may not be able to easily meet these obligations given the level of current assets of UK£445m, with a current ratio of 0.94x.
Though ASC has no debt on its balance sheet, it still has short term liabilities such as salaries to pay. As shareholders, you should try and determine whether this strategy is justified for ASC, 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. You should continue to research ASOS to get a more holistic view of the mid-cap by looking at:
- 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.
- 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.
- 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 firstname.lastname@example.org.