Mid-caps stocks, like ARC Resources Ltd. (TSE:ARX) with a market capitalization of CA$3.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. ARX’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 ARX here.
Does ARX produce enough cash relative to debt?
ARX has shrunken its total debt levels in the last twelve months, from CA$922m to CA$863m , which also accounts for long term debt. With this debt payback, ARX currently has CA$251m remaining in cash and short-term investments for investing into the business. Additionally, ARX has generated CA$834m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 97%, meaning that ARX’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ARX’s case, it is able to generate 0.97x cash from its debt capital.
Does ARX’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$341m, the company has been able to meet these commitments with a current assets level of CA$458m, leading to a 1.35x current account ratio. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is ARX’s debt level acceptable?
With debt at 24% of equity, ARX may be thought of as appropriately levered. ARX is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether ARX 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 ARX’s, case, the ratio of 4.58x 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.
ARX’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure ARX has company-specific issues impacting its capital structure decisions. I suggest you continue to research ARC Resources to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARX’s future growth? Take a look at our free research report of analyst consensus for ARX’s outlook.
- Valuation: What is ARX 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 ARX 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.