Applied Industrial Technologies, Inc. (NYSE:AIT) is a small-cap stock with a market capitalization of US$2.4b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into AIT here.
Does AIT Produce Much Cash Relative To Its Debt?
AIT has built up its total debt levels in the last twelve months, from US$313m to US$968m , which includes long-term debt. With this increase in debt, AIT’s cash and short-term investments stands at US$80m , ready to be used for running the business. Additionally, AIT has produced cash from operations of US$192m in the last twelve months, leading to an operating cash to total debt ratio of 20%, meaning that AIT’s operating cash is less than its debt.
Can AIT pay its short-term liabilities?
Looking at AIT’s US$394m in current liabilities, the company has been able to meet these commitments with a current assets level of US$1.1b, leading to a 2.75x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Trade Distributors companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
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 a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether AIT 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 AIT’s, case, the ratio of 6.71x 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.
Although AIT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 AIT has been performing in the past. You should continue to research Applied Industrial Technologies to get a better picture of the small-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 firstname.lastname@example.org. 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.