Mid-caps stocks, like Aurizon Holdings Limited (ASX:AZJ) with a market capitalization of AUD A$10.63B, 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 AZJ’s financial health. Check out our latest analysis for Aurizon Holdings
Is AZJ’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. AZJ’s debt-to-equity ratio stands at 68.64%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level. 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. AZJ’s profits amply covers interest at 4.94 times, which is seen as relatively safe. Debtors may be willing to loan the company more money, giving AZJ ample headroom to grow its debt facilities.
Can AZJ meet its short-term obligations with the cash in hand?
Another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. 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 AZJ’s current assets with its upcoming liabilities. Our analysis shows that AZJ does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Next Steps:
Are you a shareholder? AZJ’s high debt level shouldn’t be an impetus for investors to sell given its high operating cash flow seems adequate to meet obligations which means its debt is being put to good use. Given that AZJ’s capital structure may differ over time, I suggest exploring market expectations for AZJ’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 is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. AZJ’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.