Is Arconic Inc.’s (NYSE:ARNC) Balance Sheet A Threat To Its Future?

Mid-caps stocks, like Arconic Inc. (NYSE:ARNC) with a market capitalization of US$8.3b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. ARNC’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 Arconic’s financial health, so you should conduct further analysis into ARNC here.

Check out our latest analysis for Arconic

How much cash does ARNC generate through its operations?

Over the past year, ARNC has reduced its debt from US$6.9b to US$6.4b – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$1.5b for investing into the business. On top of this, ARNC has generated cash from operations of US$865m over the same time period, resulting in an operating cash to total debt ratio of 14%, indicating that ARNC’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In ARNC’s case, it is able to generate 0.14x cash from its debt capital.

Does ARNC’s liquid assets cover its short-term commitments?

With current liabilities at US$3.0b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.03x. For Aerospace & Defense companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

NYSE:ARNC Historical Debt January 24th 19
NYSE:ARNC Historical Debt January 24th 19

Is ARNC’s debt level acceptable?

ARNC is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since ARNC is presently loss-making, sustainability of its current state of operations becomes a concern. 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 ARNC’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. I admit this is a fairly basic analysis for ARNC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Arconic to get a more holistic view of the mid-cap by looking at:

  1. 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.
  2. 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.
  3. 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.