Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Reliance Steel & Aluminum Co. (NYSE:RS), with a market cap of US$6.0b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at RS’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 RS here.

View our latest analysis for Reliance Steel & Aluminum

RS’s Debt (And Cash Flows)

RS has built up its total debt levels in the last twelve months, from US$1.9b to US$2.2b – this includes long-term debt. With this growth in debt, RS currently has US$128m remaining in cash and short-term investments , ready to be used for running the business. Additionally, RS has generated cash from operations of US$665m over the same time period, resulting in an operating cash to total debt ratio of 30%, meaning that RS’s debt is appropriately covered by operating cash.

Can RS pay its short-term liabilities?

At the current liabilities level of US$699m, the company has been able to meet these commitments with a current assets level of US$3.3b, leading to a 4.7x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

Can RS service its debt comfortably?

With a debt-to-equity ratio of 47%, RS can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In RS's case, the ratio of 11.31x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving RS ample headroom to grow its debt facilities.

Next Steps:

RS’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around RS's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure RS has company-specific issues impacting its capital structure decisions. You should continue to research Reliance Steel & Aluminum to get a more holistic view of the mid-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for RS’s future growth? Take a look at our free research report of analyst consensus for RS’s outlook.

2. Valuation: What is RS 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 RS 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.