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The size of Alfa Laval AB (publ) (STO:ALFA), a kr100.00b large-cap, often attracts investors seeking a reliable investment in the stock market. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to their continued success lies in its financial health. I will provide an overview of Alfa Laval’s financial liquidity and leverage to give you an idea of Alfa Laval’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ALFA here.
Check out our latest analysis for Alfa Laval
How does ALFA’s operating cash flow stack up against its debt?
ALFA has shrunken its total debt levels in the last twelve months, from kr13.38b to kr11.98b , which comprises of short- and long-term debt. With this debt payback, ALFA’s cash and short-term investments stands at kr2.57b for investing into the business. On top of this, ALFA has generated cash from operations of kr4.66b during the same period of time, resulting in an operating cash to total debt ratio of 38.91%, signalling that ALFA’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 ALFA’s case, it is able to generate 0.39x cash from its debt capital.
Can ALFA meet its short-term obligations with the cash in hand?
At the current liabilities level of kr18.11b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of kr24.50b, with a current ratio of 1.35x. Usually, for Machinery companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does ALFA face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 53.76%, ALFA can be considered as an above-average leveraged company. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. The sustainability of ALFA’s debt levels can be assessed by comparing the company’s interest payments to earnings. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In ALFA’s case, the ratio of 20x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as ALFA is a safe investment.