Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Autoliv, Inc. (NYSE:ALV) with a market-capitalization of US$6.8b, rarely draw their attention. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. ALV’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ALV here.
Does ALV Produce Much Cash Relative To Its Debt?
ALV’s debt levels surged from US$1.3b to US$2.2b over the last 12 months , which accounts for long term debt. With this rise in debt, ALV currently has US$616m remaining in cash and short-term investments , ready to be used for running the business. Moreover, ALV has generated cash from operations of US$591m in the last twelve months, resulting in an operating cash to total debt ratio of 26%, meaning that ALV’s current level of operating cash is high enough to cover debt.
Does ALV’s liquid assets cover its short-term commitments?
With current liabilities at US$2.9b, the company has been able to meet these obligations given the level of current assets of US$3.3b, with a current ratio of 1.15x. The current ratio is calculated by dividing current assets by current liabilities. For Auto Components companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is ALV’s debt level acceptable?
ALV is a highly-leveraged company with debt exceeding equity by over 100%. 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 ALV’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 ALV, the ratio of 15.27x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as ALV’s high interest coverage is seen as responsible and safe practice.
ALV’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ALV’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 ALV has company-specific issues impacting its capital structure decisions. I suggest you continue to research Autoliv to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALV’s future growth? Take a look at our free research report of analyst consensus for ALV’s outlook.
- Valuation: What is ALV 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 ALV 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.
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