Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Air Products and Chemicals, Inc. (NYSE:APD). With a market valuation of US$41b, APD is a safe haven in times of market uncertainty due to its strong balance sheet. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Assessing the most recent data for APD, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
APD’s Debt (And Cash Flows)
APD’s debt levels surged from US$3.6b to US$3.8b over the last 12 months – this includes long-term debt. With this rise in debt, APD currently has US$3.0b remaining in cash and short-term investments , ready to be used for running the business. On top of this, APD has produced cash from operations of US$2.6b over the same time period, leading to an operating cash to total debt ratio of 70%, signalling that APD’s debt is appropriately covered by operating cash.
Can APD pay its short-term liabilities?
Looking at APD’s US$2.3b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.21x. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals 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.
Does APD face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 34%, APD’s debt level may be seen as prudent. APD is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if APD’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In APD’s case, the ratio of 21.63x suggests that interest is amply covered. Large-cap investments like APD are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
APD has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how APD has been performing in the past. I recommend you continue to research Air Products and Chemicals to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for APD’s future growth? Take a look at our free research report of analyst consensus for APD’s outlook.
- Valuation: What is APD 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 APD 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.
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