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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Alarm.com Holdings, Inc. (NASDAQ:ALRM), with a market capitalization of US$2.6b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine ALRM’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ALRM here.
Does ALRM Produce Much Cash Relative To Its Debt?
ALRM's debt levels surged from US$70m to US$109m over the last 12 months , which accounts for long term debt. With this increase in debt, ALRM currently has US$122m remaining in cash and short-term investments , ready to be used for running the business. Moreover, ALRM has generated US$56m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 52%, meaning that ALRM’s current level of operating cash is high enough to cover debt.
Can ALRM pay its short-term liabilities?
At the current liabilities level of US$76m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.18x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is ALRM’s debt level acceptable?
ALRM’s level of debt is appropriate relative to its total equity, at 23%. This range is considered safe as ALRM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether ALRM 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 ALRM's, case, the ratio of 88.08x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ALRM ample headroom to grow its debt facilities.
ALRM’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for ALRM's financial health. Other important fundamentals need to be considered alongside. You should continue to research Alarm.com Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALRM’s future growth? Take a look at our free research report of analyst consensus for ALRM’s outlook.
- Valuation: What is ALRM 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 ALRM 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.