Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Arrow Electronics, Inc. (NYSE:ARW), with a market cap of US$6.5b, often get neglected by retail investors. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at ARW’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Arrow Electronics’s financial health, so you should conduct further analysis into ARW here.
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How much cash does ARW generate through its operations?
ARW has built up its total debt levels in the last twelve months, from US$3.2b to US$3.5b – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$474m , ready to deploy into the business. Moreover, ARW has produced US$132m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 3.8%, meaning that ARW’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ARW’s case, it is able to generate 0.038x cash from its debt capital.
Does ARW’s liquid assets cover its short-term commitments?
With current liabilities at US$7.8b, it appears that the company has been able to meet these obligations given the level of current assets of US$13b, with a current ratio of 1.62x. For Electronic companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is ARW’s debt level acceptable?
With debt reaching 66% of equity, ARW may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if ARW’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For ARW, the ratio of 6.01x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ARW’s high interest coverage is seen as responsible and safe practice.
ARW’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ARW’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ARW’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Arrow Electronics to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARW’s future growth? Take a look at our free research report of analyst consensus for ARW’s outlook.
- Valuation: What is ARW 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 ARW 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.