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Mid-caps stocks, like Alaska Air Group, Inc. (NYSE:ALK) with a market capitalization of US$7.7b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine ALK’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ALK here.
Does ALK Produce Much Cash Relative To Its Debt?
ALK's debt levels surged from US$2.4b to US$3.7b over the last 12 months – this includes long-term debt. With this increase in debt, ALK's cash and short-term investments stands at US$1.4b to keep the business going. Additionally, ALK has generated cash from operations of US$1.4b during the same period of time, leading to an operating cash to total debt ratio of 37%, signalling that ALK’s current level of operating cash is high enough to cover debt.
Can ALK pay its short-term liabilities?
At the current liabilities level of US$3.4b, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$2.0b, leading to a current ratio of 0.59x. The current ratio is the number you get when you divide current assets by current liabilities.
Does ALK face the risk of succumbing to its debt-load?
ALK is a relatively highly levered company with a debt-to-equity of 52%. 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 ALK's case, the ratio of 24.33x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although ALK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the mid-cap. Keep in mind I haven't considered other factors such as how ALK has been performing in the past. You should continue to research Alaska Air Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALK’s future growth? Take a look at our free research report of analyst consensus for ALK’s outlook.
- Valuation: What is ALK 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 ALK 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 firstname.lastname@example.org. 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.