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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like ARC Resources Ltd (TSX:ARX), with a market cap of CA$4.85B, are often out of the spotlight. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at ARX’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ARX here. Check out our latest analysis for ARC Resources
Does ARX generate enough cash through operations?
Over the past year, ARX has reduced its debt from CA$1.03B to CA$911.30M – this includes both the current and long-term debt. With this debt payback, ARX currently has CA$220.20M remaining in cash and short-term investments for investing into the business. On top of this, ARX has produced CA$672.80M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 73.83%, meaning that ARX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ARX’s case, it is able to generate 0.74x cash from its debt capital.
Can ARX meet its short-term obligations with the cash in hand?
With current liabilities at CA$497.30M, it seems that the business has been able to meet these commitments with a current assets level of CA$818.70M, leading to a 1.65x current account ratio. Usually, for Oil and Gas companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ARX face the risk of succumbing to its debt-load?
With debt at 24.84% of equity, ARX may be thought of as appropriately levered. ARX is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether ARX 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 ARX’s, case, the ratio of 11.21x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.