Stocks with market capitalization between $2B and $10B, such as Atlas Arteria Limited (ASX:ALX) with a size of AU$4.4b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at ALX’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ALX here.
How much cash does ALX generate through its operations?
Over the past year, ALX has ramped up its debt from AU$1.5b to AU$1.9b , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$156m , ready to deploy into the business. On top of this, ALX has produced AU$46m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 2.4%, signalling that ALX’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ALX’s case, it is able to generate 0.024x cash from its debt capital.
Does ALX’s liquid assets cover its short-term commitments?
Looking at ALX’s AU$206m in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of AU$157m, leading to a current ratio of 0.76x.
Can ALX service its debt comfortably?
With a debt-to-equity ratio of 87%, ALX 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.
ALX’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven’t considered other factors such as how ALX has been performing in the past. You should continue to research Atlas Arteria to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALX’s future growth? Take a look at our free research report of analyst consensus for ALX’s outlook.
- Valuation: What is ALX 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 ALX 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.