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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Acuity Brands, Inc. (NYSE:AYI) with a market-capitalization of US$5.3b, rarely draw their attention. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. AYI’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. Don’t forget that this is a general and concentrated examination of Acuity Brands's financial health, so you should conduct further analysis into AYI here.
Does AYI Produce Much Cash Relative To Its Debt?
AYI has sustained its debt level by about US$357m over the last 12 months which accounts for long term debt. At this stable level of debt, AYI's cash and short-term investments stands at US$232m to keep the business going. Moreover, AYI has generated cash from operations of US$364m in the last twelve months, resulting in an operating cash to total debt ratio of 102%, indicating that AYI’s debt is appropriately covered by operating cash.
Can AYI meet its short-term obligations with the cash in hand?
With current liabilities at US$584m, the company has been able to meet these obligations given the level of current assets of US$1.2b, with a current ratio of 2.11x. The current ratio is calculated by dividing current assets by current liabilities. For Electrical companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does AYI face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 20%, AYI's debt level may be seen as prudent. AYI is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether AYI 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 AYI's, case, the ratio of 13.64x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as AYI’s high interest coverage is seen as responsible and safe practice.
AYI’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for AYI's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Acuity Brands to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AYI’s future growth? Take a look at our free research report of analyst consensus for AYI’s outlook.
- Valuation: What is AYI 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 AYI 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 email@example.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.