Mid-caps stocks, like Autoliv Inc (NYSE:ALV) with a market capitalization of US$8.13b, 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. Today we will look at ALV’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ALV here.
How does ALV’s operating cash flow stack up against its debt?
Over the past year, ALV has ramped up its debt from US$1.51b to US$2.28b – this includes both the current and long-term debt. With this growth in debt, ALV’s cash and short-term investments stands at US$507.5m for investing into the business. On top of this, ALV has generated US$670.3m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 29.4%, indicating that ALV’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ALV’s case, it is able to generate 0.29x cash from its debt capital.
Can ALV pay its short-term liabilities?
At the current liabilities level of US$2.75b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. Generally, for Auto Components companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does ALV face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, ALV is a highly leveraged company. 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 ALV 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 ALV’s, case, the ratio of 17.69x 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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how ALV has been performing in the past. I suggest you continue to research Autoliv to get a more holistic view 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.
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 firstname.lastname@example.org.