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Why The a2 Milk Company Limited (NZSE:ATM) Is A Financially Healthy Company

Simply Wall St

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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as The a2 Milk Company Limited (NZSE:ATM) with a market-capitalization of NZ$10b, rarely draw their attention. 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. Let’s take a look at ATM’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ATM here.

Check out our latest analysis for a2 Milk

Is ATM’s debt level acceptable?

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%. The good news for investors is that a2 Milk has no debt. 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 ATM, and the company has plenty of headroom and ability to raise debt should it need to in the future.

NZSE:ATM Historical Debt, March 28th 2019

Can ATM pay its short-term liabilities?

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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at NZ$151m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.21x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

Next Steps:

ATM has no debt in addition to ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and its investors, though, some level of debt may also ramp up 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. I suggest you continue to research a2 Milk to get a better picture of the stock by looking at:

  1. 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.
  2. 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.
  3. 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 editorial-team@simplywallst.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.