There are a number of reasons that attract investors towards large-cap companies such as AMETEK, Inc. (NYSE:AME), with a market cap of US$20b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the health of the financials determines whether the company continues to succeed. Let’s take a look at AMETEK’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AME here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Does AME Produce Much Cash Relative To Its Debt?
Over the past year, AME has ramped up its debt from US$2.2b to US$2.7b – this includes long-term debt. With this increase in debt, AME's cash and short-term investments stands at US$368m to keep the business going. On top of this, AME has produced cash from operations of US$944m in the last twelve months, resulting in an operating cash to total debt ratio of 35%, indicating that AME’s debt is appropriately covered by operating cash.
Does AME’s liquid assets cover its short-term commitments?
With current liabilities at US$1.0b, it seems that the business has been able to meet these obligations given the level of current assets of US$1.9b, with a current ratio of 1.91x. The current ratio is the number you get when you divide current assets by current liabilities. For Electrical companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can AME service its debt comfortably?
With debt reaching 60% of equity, AME may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. By measuring how many times AME’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In AME's case, the ratio of 13.83x suggests that interest is amply covered. Large-cap investments like AME are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Although AME’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 AME's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for AME's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research AMETEK to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AME’s future growth? Take a look at our free research report of analyst consensus for AME’s outlook.
- Valuation: What is AME 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 AME 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 email@example.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.