Mid-caps stocks, like Advanced Disposal Services Inc (NYSE:ADSW) with a market capitalization of USD $2.20B, 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, primarily due to seasoned executives running a lean corporate structure. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. View our latest analysis for Advanced Disposal Services
Is ADSW’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For ADSW, the debt-to-equity ratio stands at above 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, availability of cash may dry up, making it hard to operate. We can test if ADSW’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. ADSW’s interest on debt is not strongly covered by earnings as it sits at around 1.22x. Debtors may be less inclined to loan the company more money, giving ADSW less headroom for growth through debt.
Can ADSW meet its short-term obligations with the cash in hand?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. In order to measure liquidity, we must compare ADSW’s current assets with its upcoming liabilities. Our analysis shows that ADSW is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Are you a shareholder? ADSW’s high debt levels are not met with high cash flow coverage. This means investors should ask themselves if they think ADSW can improve in terms of debt management and operational efficiency. Since ADSW’s financial situation could change, I suggest examining market expectations for ADSW’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. ADSW’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.