Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as The a2 Milk Company Limited (NZSE:ATM) with a market capitalization of NZ$5.79B, rarely draw their attention from analysts and investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Mid-caps are found to be more volatile than the large-caps but safer than small-caps, largely due to their weaker balance sheet. I recommend you look at the following hurdles to assess ATM’s financial health. View our latest analysis for a2 Milk
Does ATM face the risk of succumbing to its debt-load?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For a2 Milk, investors should not worry about its debt levels because the company has none! It has been operating its business with zero debt and utilising only its equity capital. Whether it’s an issue of access to debt or management choosing not to borrow, investors risk associated with debt issues is virtually non-existent with ATM.
Can ATM meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, a2 Milk has no solvency issues. Solvency is the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. Our analysis shows that ATM does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Next Steps:
Are you a shareholder? ATM has no debt as well as ample cash to cover its near-term liabilities such as salary and supplier payments. While it’s safe operations might reduce risk for the company and investors, some degree of debt could also boost earnings growth and operational efficiency. Since ATM’s capital structure may change, I encourage researching market expectations for ATM’s future growth on our free analysis platform.
Are you a potential investor? While understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. Ultimately, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. ATM’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.