Investors are always looking for growth in small-cap stocks like Anixter International Inc. (NYSE:AXE), with a market cap of US$1.9b. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into AXE here.
Does AXE produce enough cash relative to debt?
AXE has sustained its debt level by about US$1.3b over the last 12 months – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$70m for investing into the business. On top of this, AXE has generated US$177m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 14%, indicating that AXE’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AXE’s case, it is able to generate 0.14x cash from its debt capital.
Does AXE’s liquid assets cover its short-term commitments?
Looking at AXE’s US$2.0b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.6x. 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.
Does AXE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 81%, AXE can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether AXE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AXE’s, case, the ratio of 4.43x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AXE ample headroom to grow its debt facilities.
AXE’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 AXE’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how AXE has been performing in the past. You should continue to research Anixter International to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AXE’s future growth? Take a look at our free research report of analyst consensus for AXE’s outlook.
- Valuation: What is AXE 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 AXE 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 email@example.com.