Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as AGCO Corporation (NYSE:AGCO), with a market capitalization of US$4.9b, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. AGCO’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AGCO here.
Does AGCO produce enough cash relative to debt?
AGCO has shrunken its total debt levels in the last twelve months, from US$1.7b to US$1.5b , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$326m , ready to deploy into the business. Moreover, AGCO has generated US$596m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 41%, meaning that AGCO’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AGCO’s case, it is able to generate 0.41x cash from its debt capital.
Does AGCO’s liquid assets cover its short-term commitments?
With current liabilities at US$2.8b, the company has been able to meet these obligations given the level of current assets of US$3.5b, with a current ratio of 1.28x. Generally, for Machinery companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is AGCO’s debt level acceptable?
AGCO is a relatively highly levered company with a debt-to-equity of 49%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether AGCO is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AGCO’s, case, the ratio of 9.31x 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.
AGCO’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 AGCO’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 AGCO has company-specific issues impacting its capital structure decisions. You should continue to research AGCO to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AGCO’s future growth? Take a look at our free research report of analyst consensus for AGCO’s outlook.
- Valuation: What is AGCO 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 AGCO 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.