Stocks with market capitalization between $2B and $10B, such as The a2 Milk Company Limited (ASX:A2M) with a size of A$6.10B, do not attract as much attention from the investing community as do the small-caps and large-caps. 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. A2M’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of Amazon’s financial health, so you should conduct further analysis into A2M here. Check out our latest analysis for a2 Milk
Is A2M’s debt level acceptable?
Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. Generally, mid-cap stocks are considered financially healthy if its ratio is below 40%. The good news for investors is that a2 Milk has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors’ risk associated with debt is virtually non-existent with A2M, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can A2M pay its short-term liabilities?
Since a2 Milk doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe 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. With current liabilities at NZ$102.3M, it appears that the company has been able to meet these commitments with a current assets level of NZ$258.3M, leading to a 2.52x current account ratio. For Food companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
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A2M has no debt as well as ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and its investors, however, some degree of debt may also boost earnings growth and operational efficiency. This is only a rough assessment of financial health, and I’m sure A2M has company-specific issues impacting its capital structure decisions. You should continue to research a2 Milk to get a more holistic view of the stock by looking at: