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Is Avnet, Inc.'s (NASDAQ:AVT) Balance Sheet A Threat To Its Future?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Avnet, Inc. (NASDAQ:AVT), with a market cap of US$4.6b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about 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. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into AVT here.

AVT’s Debt (And Cash Flows)

Over the past year, AVT has ramped up its debt from US$1.6b to US$2.1b – this includes long-term debt. With this rise in debt, AVT currently has US$725m remaining in cash and short-term investments to keep the business going. Moreover, AVT has generated US$436m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 21%, signalling that AVT’s current level of operating cash is high enough to cover debt.

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

With current liabilities at US$2.3b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.11x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

NasdaqGS:AVT Historical Debt, June 23rd 2019

Does AVT face the risk of succumbing to its debt-load?

With debt reaching 48% of equity, AVT may be thought of as relatively highly levered. 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 AVT 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 AVT's, case, the ratio of 4.8x 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.

Next Steps:

AVT’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. Since there is also no concerns around AVT's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how AVT has been performing in the past. I suggest you continue to research Avnet to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for AVT’s future growth? Take a look at our free research report of analyst consensus for AVT’s outlook.
  2. Valuation: What is AVT 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 AVT 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.