What does ALLETE Inc’s (NYSE:ALE) Balance Sheet Tell Us About Its Future?
Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like ALLETE Inc (NYSE:ALE), with a market cap of US$3.85b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. ALE’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. Don’t forget that this is a general and concentrated examination of ALLETE’s financial health, so you should conduct further analysis into ALE here.
Check out our latest analysis for ALLETE
How does ALE’s operating cash flow stack up against its debt?
Over the past year, ALE has maintained its debt levels at around US$1.52b comprising of short- and long-term debt. At this current level of debt, ALE’s cash and short-term investments stands at US$121.9m for investing into the business. Moreover, ALE has generated cash from operations of US$412.9m in the last twelve months, leading to an operating cash to total debt ratio of 27.2%, signalling that ALE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ALE’s case, it is able to generate 0.27x cash from its debt capital.
Does ALE’s liquid assets cover its short-term commitments?
At the current liabilities level of US$350.2m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$424.0m, with a current ratio of 1.21x. Usually, for Electric Utilities companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can ALE service its debt comfortably?
ALE is a relatively highly levered company with a debt-to-equity of 72.0%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if ALE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For ALE, the ratio of 2.91x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ALE’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Although ALE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ALE’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure ALE has company-specific issues impacting its capital structure decisions. You should continue to research ALLETE to get a better picture of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for ALE’s future growth? Take a look at our free research report of analyst consensus for ALE’s outlook.
Valuation: What is ALE 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 ALE 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 editorial-team@simplywallst.com.
