Mid-caps stocks, like ALLETE Inc (NYSE:ALE) with a market capitalization of $4.05B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups, primarily due to seasoned executives running a lean corporate structure. I recommend you look at the following hurdles to assess ALE’s financial health. Check out our latest analysis for ALLETE

Can ALE service its debt comfortably?

Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. In the case of ALE, the debt-to-equity ratio is 73.86%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. ALE’s interest on debt is sufficiently covered by earnings as it sits at around 3.65x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Does ALE’s liquid assets cover its short-term commitments?

Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. To assess this, I compare ALE’s cash and other liquid assets against its upcoming debt. Our analysis shows that ALE is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.

Next Steps:

Are you a shareholder? ALE’s high cash coverage means that, although its debt levels are high, investors shouldn’t panic since the company is able to utilise its borrowings efficiently in order to generate cash flow. Given that ALE’s financial position may differ over time, I recommend examining market expectations for ALE’s future growth on our free analysis platform.

Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. ALE’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.