Mid-caps stocks, like Advanced Energy Industries, Inc. (NASDAQ:AEIS) with a market capitalization of US$2.1b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. 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. Today we will look at AEIS’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 AEIS here.
Can AEIS 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. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For Advanced Energy Industries, investors should not worry about its debt levels because the company has none! This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with AEIS, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does AEIS’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Advanced Energy Industries 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. Looking at AEIS’s US$112m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$573m, leading to a 5.12x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
AEIS 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 ramp up earnings growth and operational efficiency. I admit this is a fairly basic analysis for AEIS's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Advanced Energy Industries to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AEIS’s future growth? Take a look at our free research report of analyst consensus for AEIS’s outlook.
- Valuation: What is AEIS 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 AEIS 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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