Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as AltaGas Ltd (TSE:ALA), with a market cap of CA$3.9b, often get neglected by retail investors. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at ALA’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into ALA here.
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How does ALA’s operating cash flow stack up against its debt?
Over the past year, ALA has ramped up its debt from CA$3.7b to CA$10b , which accounts for long term debt. With this growth in debt, ALA's cash and short-term investments stands at CA$14m for investing into the business. On top of this, ALA has generated cash from operations of CA$136m during the same period of time, leading to an operating cash to total debt ratio of 1.3%, indicating that ALA’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In ALA’s case, it is able to generate 0.013x cash from its debt capital.
Can ALA pay its short-term liabilities?
Looking at ALA’s CA$4.6b in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of CA$3.5b, with a current ratio of 0.77x.
Is ALA’s debt level acceptable?
ALA is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since ALA is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although ALA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven't considered other factors such as how ALA has been performing in the past. You should continue to research AltaGas to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALA’s future growth? Take a look at our free research report of analyst consensus for ALA’s outlook.
- Valuation: What is ALA 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 ALA 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
About TSX:ALA
Good value low.
