Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Avnet, Inc. (NASDAQ:AVT), with a market cap of US$5.1b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. AVT’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 Avnet’s financial health, so you should conduct further analysis into AVT here.
Does AVT Produce Much Cash Relative To Its Debt?
AVT's debt levels surged from US$1.7b to US$2.0b over the last 12 months , which accounts for long term debt. With this increase in debt, AVT's cash and short-term investments stands at US$482m to keep the business going. Additionally, AVT has generated US$244m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 12%, meaning that AVT’s debt is not covered by operating cash.
Does AVT’s liquid assets cover its short-term commitments?
Looking at AVT’s US$2.5b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$7.4b, with a current ratio of 2.99x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Electronic companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does AVT face the risk of succumbing to its debt-load?
With debt reaching 45% of equity, AVT may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. But since AVT is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
AVT’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 AVT'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 AVT has been performing in the past. I recommend you continue to research Avnet to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AVT’s future growth? Take a look at our free research report of analyst consensus for AVT’s outlook.
- Valuation: What is AVT 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 AVT 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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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.