Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Altium Limited (ASX:ALU) with a market-capitalization of AU$4.3b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. ALU’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 Altium’s financial health, so you should conduct further analysis into ALU here.
Is ALU’s debt level acceptable?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. The good news for investors is that Altium has no debt. It has been operating its business with zero debt and utilising only its equity capital. Investors’ risk associated with debt is virtually non-existent with ALU, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does ALU’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Altium has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at US$54m, it seems that the business has been able to meet these obligations given the level of current assets of US$100m, with a current ratio of 1.84x. Generally, for Software companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
ALU has zero-debt in addition to ample cash to cover its short-term liabilities. Its safe operations reduces risk for the company and its investors, however, some level of debt may also boost earnings growth and operational efficiency. I admit this is a fairly basic analysis for ALU’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Altium to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALU’s future growth? Take a look at our free research report of analyst consensus for ALU’s outlook.
- Valuation: What is ALU 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 ALU 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.