Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as AVX Corporation (NYSE:AVX) with a market-capitalization of US$2.9b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at AVX’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into AVX here.
Is AVX’s debt level acceptable?
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. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. For AVX, the debt-to-equity ratio is zero, meaning that the company has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with AVX, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can AVX meet its short-term obligations with the cash in hand?
Since AVX doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term 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 US$307m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.81x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
AVX has no debt in addition to ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and shareholders, however, some degree of debt could also ramp up earnings growth and operational efficiency. Keep in mind I haven't considered other factors such as how AVX has performed in the past. I suggest you continue to research AVX to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AVX’s future growth? Take a look at our free research report of analyst consensus for AVX’s outlook.
- Valuation: What is AVX 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 AVX 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.
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 firstname.lastname@example.org. 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.