Does Aggreko Plc's (LON:AGK) Debt Level Pose A Problem?

Simply Wall St

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Aggreko Plc (LON:AGK), with a market cap of UK£2.1b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine AGK’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Aggreko’s financial health, so you should conduct further analysis into AGK here.

View our latest analysis for Aggreko

Does AGK Produce Much Cash Relative To Its Debt?

AGK has built up its total debt levels in the last twelve months, from UK£725m to UK£771m , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at UK£100m to keep the business going. On top of this, AGK has produced UK£330m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 43%, meaning that AGK’s current level of operating cash is high enough to cover debt.

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

Looking at AGK’s UK£571m in current liabilities, the company has been able to meet these commitments with a current assets level of UK£1.1b, leading to a 1.99x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Commercial Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

LSE:AGK Historical Debt, April 20th 2019

Is AGK’s debt level acceptable?

AGK is a relatively highly levered company with a debt-to-equity of 56%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if AGK’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AGK, the ratio of 5.93x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although AGK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how AGK has been performing in the past. I recommend you continue to research Aggreko to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for AGK’s future growth? Take a look at our free research report of analyst consensus for AGK’s outlook.
  2. Valuation: What is AGK worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AGK is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.