Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Arconic Inc (NYSE:ARNC), with a market capitalization of US$10.0b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at ARNC’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ARNC here.
How much cash does ARNC generate through its operations?
ARNC’s debt levels have fallen from US$6.8b to US$6.4b over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, ARNC’s cash and short-term investments stands at US$1.5b for investing into the business. Additionally, ARNC has generated cash from operations of US$757m in the last twelve months, resulting in an operating cash to total debt ratio of 12%, signalling that ARNC’s operating cash is not sufficient to cover its debt. 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 0.12x cash from its debt capital.
Can ARNC pay its short-term liabilities?
At the current liabilities level of US$3.0b liabilities, the company has been able to meet these obligations given the level of current assets of US$6.1b, with a current ratio of 2.04x. For Aerospace & Defense companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ARNC service its debt comfortably?
With total debt exceeding equities, ARNC is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since ARNC is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
ARNC’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for ARNC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Arconic to get a better picture 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.