Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as ALS Limited (ASX:ALQ), with a market capitalization of AU$3.8b, rarely draw their attention from the investing community. 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. This article will examine ALQ’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 ALQ here.
ALQ’s Debt (And Cash Flows)
Over the past year, ALQ has maintained its debt levels at around AU$740m including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at AU$153m to keep the business going. Moreover, ALQ has generated cash from operations of AU$216m during the same period of time, leading to an operating cash to total debt ratio of 29%, meaning that ALQ’s operating cash is sufficient to cover its debt.
Can ALQ meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$527m, it appears that the company has been able to meet these obligations given the level of current assets of AU$628m, with a current ratio of 1.19x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Professional Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ALQ face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 67%, ALQ can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if ALQ’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For ALQ, the ratio of 10.11x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as ALQ’s high interest coverage is seen as responsible and safe practice.
ALQ’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ALQ’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ALQ’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research ALS to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALQ’s future growth? Take a look at our free research report of analyst consensus for ALQ’s outlook.
- Valuation: What is ALQ 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 ALQ 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.
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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.