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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Algonquin Power & Utilities Corp (TSX:AQN), with a market cap of CA$5.91B, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at AQN’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into AQN here. See our latest analysis for Algonquin Power & Utilities
Does AQN generate an acceptable amount of cash through operations?
AQN has shrunken its total debt levels in the last twelve months, from CA$4.29B to CA$3.96B , which comprises of short- and long-term debt. With this debt repayment, AQN currently has CA$54.55M remaining in cash and short-term investments , ready to deploy into the business. On top of this, AQN has produced cash from operations of CA$457.80M in the last twelve months, leading to an operating cash to total debt ratio of 11.55%, meaning that AQN’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AQN’s case, it is able to generate 0.12x cash from its debt capital.
Does AQN’s liquid assets cover its short-term commitments?
Looking at AQN’s most recent CA$707.61M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of CA$625.21M, with a current ratio of 0.88x below the prudent level of 3x.
Is AQN’s debt level acceptable?
AQN is a relatively highly levered company with a debt-to-equity of 94.01%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether AQN 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 AQN’s, case, the ratio of 2.47x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as AQN’s low interest coverage already puts the company at higher risk of default.
Next Steps:
AQN’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the mid-cap. Keep in mind I haven’t considered other factors such as how AQN has been performing in the past. You should continue to research Algonquin Power & Utilities to get a more holistic view of the stock by looking at: