Stocks with market capitalization between $2B and $10B, such as Yancoal Australia Ltd (ASX:YAL) with a size of AUD A$4.40B, do not attract as much attention from the investing community as do the small-caps and large-caps. 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 YAL’s financial health. See our latest analysis for YAL

Does YAL 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. In the case of YAL, the debt-to-equity ratio is over 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, availability of cash may dry up, making it hard to operate. While debt-to-equity ratio has several factors at play, an easier way to check whether YAL’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. In YAL’s case, its interest is not sufficiently covered by its profits as the ratio is 0.56x. This means lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Can YAL meet its short-term obligations with the cash in hand?

A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. In order to measure liquidity, we must compare YAL’s current assets with its upcoming liabilities. Our analysis shows that YAL 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? With a high level of debt on its balance sheet, YAL could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case so investors should ask themselves if they believe YAL can sustainably increase its operational efficiency going forward. Since YAL’s capital structure may change, You should continue exploring market expectations for YAL’s future growth on our free analysis platform.