Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Arconic Inc (NYSE:ARNC) a safer option. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Arconic’s financial liquidity and leverage to give you an idea of Arconic’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ARNC here.
How much cash does ARNC generate through its operations?
ARNC’s debt levels have fallen from US$8.09b to US$6.35b over the last 12 months , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$1.21b for investing into the business. Additionally, ARNC has produced cash from operations of US$660.00m in the last twelve months, resulting in an operating cash to total debt ratio of 10.39%, signalling that ARNC’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In ARNC’s case, it is able to generate 0.1x cash from its debt capital.
Can ARNC pay its short-term liabilities?
At the current liabilities level of US$2.80b liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$5.90b, leading to a 2.1x current account ratio. For Aerospace & Defense companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can ARNC service its debt comfortably?
Arconic is a highly levered company given that total debt exceeds equity. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. Though, since ARNC is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
ARNC’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure ARNC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Arconic to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARNC’s future growth? Take a look at our free research report of analyst consensus for ARNC’s outlook.
- Valuation: What is ARNC 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 ARNC 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 firstname.lastname@example.org.