Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like The a2 Milk Company Limited (NZSE:ATM), with a market cap of NZ$8.73b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at ATM’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ATM here.
Can ATM service its debt comfortably?
Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. For a2 Milk, investors should not worry about its debt levels because the company has none! 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 ATM, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does ATM’s liquid assets cover its short-term commitments?
Since a2 Milk doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term 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. Looking at ATM’s most recent NZ$166.7m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of NZ$506.1m, with a current ratio of 3.03x. However, a ratio greater than 3x may be considered as quite high, and some might argue ATM could be holding too much capital in a low-return investment environment.
ATM has zero-debt in addition to ample cash to cover its short-term commitments. Its safe operations reduces risk for the company and shareholders, but some level of debt could also boost earnings growth and operational efficiency. This is only a rough assessment of financial health, and I’m sure ATM has company-specific issues impacting its capital structure decisions. You should continue to research a2 Milk to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ATM’s future growth? Take a look at our free research report of analyst consensus for ATM’s outlook.
- Valuation: What is ATM 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 ATM 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.