Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Aggreko Plc (LON:AGK), with a market capitalization of UK£2.2b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. AGK’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 Aggreko’s financial health, so you should conduct further analysis into AGK here.
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How does AGK’s operating cash flow stack up against its debt?
AGK has built up its total debt levels in the last twelve months, from UK£738m to UK£817m , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at UK£76m for investing into the business. Additionally, AGK has generated UK£322m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 39%, indicating that AGK’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AGK’s case, it is able to generate 0.39x cash from its debt capital.
Does AGK’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£586m liabilities, it seems that the business has been able to meet these commitments with a current assets level of UK£1.1b, leading to a 1.87x current account ratio. Usually, for Commercial 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.
Can AGK service its debt comfortably?
AGK is a relatively highly levered company with a debt-to-equity of 63%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether AGK 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 AGK's, case, the ratio of 6.4x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AGK ample headroom to grow its debt facilities.
Next Steps:
AGK’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how AGK has been performing in the past. I recommend you continue to research Aggreko to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AGK’s future growth? Take a look at our free research report of analyst consensus for AGK’s outlook.
- Valuation: What is AGK 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 AGK 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.