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What does Altra Industrial Motion Corp.'s (NASDAQ:AIMC) Balance Sheet Tell Us About Its Future?

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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Altra Industrial Motion Corp. (NASDAQ:AIMC), with a market capitalization of US$2.0b, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. AIMC’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into AIMC here.

See our latest analysis for Altra Industrial Motion

Does AIMC Produce Much Cash Relative To Its Debt?

AIMC has built up its total debt levels in the last twelve months, from US$304m to US$1.8b – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$152m to keep the business going. Additionally, AIMC has produced US$152m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 8.7%, meaning that AIMC’s current level of operating cash is not high enough to cover debt.

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

At the current liabilities level of US$347m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.06x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqGS:AIMC Historical Debt, June 4th 2019
NasdaqGS:AIMC Historical Debt, June 4th 2019

Is AIMC’s debt level acceptable?

With a debt-to-equity ratio of 94%, AIMC 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In AIMC's case, the ratio of 4.06x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AIMC ample headroom to grow its debt facilities.

Next Steps:

Although AIMC’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure AIMC has company-specific issues impacting its capital structure decisions. I suggest you continue to research Altra Industrial Motion to get a better picture of the mid-cap by looking at:

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

  2. Valuation: What is AIMC 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 AIMC 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.

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