Does ADT Inc's (NYSE:ADT) Debt Level Pose A Problem?

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as ADT Inc (NYSE:ADT), with a market capitalization of US$9.37B, rarely draw their attention from the investing community. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. ADT’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into ADT here. See our latest analysis for ADT

Does ADT generate enough cash through operations?

ADT's debt levels surged from US$1.35B to US$10.14B over the last 12 months , which is made up of current and long term debt. With this increase in debt, ADT's cash and short-term investments stands at US$75.89M , ready to deploy into the business. Additionally, ADT has produced cash from operations of US$617.52M over the same time period, resulting in an operating cash to total debt ratio of 6.09%, meaning that ADT’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In ADT’s case, it is able to generate 0.061x cash from its debt capital.

Can ADT pay its short-term liabilities?

With current liabilities at US$852.54M, it seems that the business is not able to meet these obligations given the level of current assets of US$388.36M, with a current ratio of 0.46x below the prudent level of 3x.

Can ADT service its debt comfortably?

Since total debt levels have outpaced equities, ADT is a highly leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since ADT is presently unprofitable, 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.

Next Steps:

ADT’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I'm sure ADT has company-specific issues impacting its capital structure decisions. I suggest you continue to research ADT to get a better picture of the stock by looking at:

• 1. Valuation: What is ADT 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 ADT is currently mispriced by the market.
• 2. Historical Performance: What has ADT's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
• 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.