Stocks with market capitalization between $2B and $10B, such as MTU Aero Engines AG (XTRA:MTX) with a size of €8.16B, do not attract as much attention from the investing community as do the small-caps and large-caps. 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. MTX’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into MTX here. View our latest analysis for MTU Aero Engines
How does MTX’s operating cash flow stack up against its debt?
Over the past year, MTX has reduced its debt from €1.48B to €1.09B , which comprises of short- and long-term debt. With this debt repayment, MTX currently has €134.50M remaining in cash and short-term investments , ready to deploy into the business. On top of this, MTX has generated €482.50M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 44.35%, indicating that MTX’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MTX’s case, it is able to generate 0.44x cash from its debt capital.
Does MTX’s liquid assets cover its short-term commitments?
Looking at MTX’s most recent €2.13B liabilities, it seems that the business has been able to meet these commitments with a current assets level of €2.48B, leading to a 1.16x current account ratio. Generally, for Aerospace & Defense companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does MTX face the risk of succumbing to its debt-load?
With debt reaching 54.67% of equity, MTX may be thought of as relatively highly levered. 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 MTX 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 MTX’s, case, the ratio of 99.65x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MTX ample headroom to grow its debt facilities.
MTX’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. I admit this is a fairly basic analysis for MTX’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research MTU Aero Engines to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MTX’s future growth? Take a look at our free research report of analyst consensus for MTX’s outlook.
- Valuation: What is MTX 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 MTX 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 pass 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.