Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Auckland International Airport Limited (NZSE:AIA), with a market cap of NZ$9.7b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine AIA’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into AIA here.
AIA’s Debt (And Cash Flows)
Over the past year, AIA has maintained its debt levels at around NZ$2.2b including long-term debt. At this constant level of debt, AIA currently has NZ$65m remaining in cash and short-term investments , ready to be used for running the business. On top of this, AIA has produced cash from operations of NZ$329m during the same period of time, resulting in an operating cash to total debt ratio of 15%, indicating that AIA’s current level of operating cash is not high enough to cover debt.
Can AIA meet its short-term obligations with the cash in hand?
Looking at AIA’s NZ$402m in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.42x. The current ratio is calculated by dividing current assets by current liabilities.
Can AIA service its debt comfortably?
With debt at 38% of equity, AIA may be thought of as appropriately levered. AIA is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether AIA 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 AIA's, case, the ratio of 5.68x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AIA ample headroom to grow its debt facilities.
Although AIA’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Furthermore, its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I'm sure AIA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Auckland International Airport to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AIA’s future growth? Take a look at our free research report of analyst consensus for AIA’s outlook.
- Historical Performance: What has AIA's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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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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.