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Stocks with market capitalization between $2B and $10B, such as Applied Industrial Technologies, Inc. (NYSE:AIT) with a size of US$2.1b, do not attract as much attention from the investing community as do the small-caps and large-caps. 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 AIT’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 AIT here.
Does AIT Produce Much Cash Relative To Its Debt?
Over the past year, AIT has reduced its debt from US$1.0b to US$982m , which includes long-term debt. With this reduction in debt, AIT currently has US$47m remaining in cash and short-term investments , ready to be used for running the business. On top of this, AIT has generated US$177m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 18%, signalling that AIT’s current level of operating cash is not high enough to cover debt.
Does AIT’s liquid assets cover its short-term commitments?
Looking at AIT’s US$417m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$1.1b, leading to a 2.7x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Trade Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does AIT face the risk of succumbing to its debt-load?
With total debt exceeding equity, AIT is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In AIT’s case, the ratio of 6.56x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AIT ample headroom to grow its debt facilities.
AIT’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. This is only a rough assessment of financial health, and I’m sure AIT has company-specific issues impacting its capital structure decisions. I suggest you continue to research Applied Industrial Technologies to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AIT’s future growth? Take a look at our free research report of analyst consensus for AIT’s outlook.
- Valuation: What is AIT 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 AIT 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. Thank you for reading.