Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Mid-caps stocks, like Applied Industrial Technologies, Inc. (NYSE:AIT) with a market capitalization of US$2.2b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. 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. AIT’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 Applied Industrial Technologies’s financial health, so you should conduct further analysis into AIT here.
AIT’s Debt (And Cash Flows)
AIT has shrunk its total debt levels in the last twelve months, from US$1.0b to US$982m – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$47m , ready to be used for running the business. Moreover, AIT has generated cash from operations of US$177m in the last twelve months, resulting in an operating cash to total debt ratio of 18%, meaning that AIT’s current level of operating cash is not high enough to cover debt.
Can AIT meet its short-term obligations with the cash in hand?
With current liabilities at US$417m, it seems that the business has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 2.7x. The current ratio is the number you get when you divide current assets by current liabilities. For Trade Distributors companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does AIT face the risk of succumbing to its debt-load?
With total debt exceeding equity, AIT is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 AIT's case, the ratio of 6.56x suggests that interest is appropriately 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 AIT’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 AIT's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how AIT has been performing in the past. I suggest you continue to research Applied Industrial Technologies to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AIT’s future growth? Take a look at our free research report of analyst consensus for AIT’s outlook.
- Valuation: What is AIT 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 AIT 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.