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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as A. O. Smith Corporation (NYSE:AOS), with a market capitalization of US$8.7b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine AOS’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 AOS here.
How much cash does AOS generate through its operations?
AOS has shrunken its total debt levels in the last twelve months, from US$410m to US$221m , which includes long-term debt. With this debt repayment, AOS’s cash and short-term investments stands at US$645m , ready to deploy into the business. On top of this, AOS has generated cash from operations of US$449m over the same time period, leading to an operating cash to total debt ratio of 203%, signalling that AOS’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AOS’s case, it is able to generate 2.03x cash from its debt capital.
Can AOS meet its short-term obligations with the cash in hand?
With current liabilities at US$785m, it seems that the business has been able to meet these commitments with a current assets level of US$1.6b, leading to a 2.09x current account ratio. Generally, for Building companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is AOS’s debt level acceptable?
With debt at 13% of equity, AOS may be thought of as appropriately levered. This range is considered safe as AOS is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether AOS 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 AOS’s, case, the ratio of 66.95x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as AOS’s high interest coverage is seen as responsible and safe practice.
AOS has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how AOS has been performing in the past. I recommend you continue to research A. O. Smith to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AOS’s future growth? Take a look at our free research report of analyst consensus for AOS’s outlook.
- Valuation: What is AOS 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 AOS 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. On rare occasion, data errors may occur. Thank you for reading.