Advertisement
Singapore markets closed
  • Straits Times Index

    3,224.01
    -27.70 (-0.85%)
     
  • Nikkei

    40,168.07
    -594.66 (-1.46%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • FTSE 100

    7,964.33
    +32.35 (+0.41%)
     
  • Bitcoin USD

    70,756.41
    +1,782.94 (+2.58%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,252.56
    +4.07 (+0.08%)
     
  • Dow

    39,780.40
    +20.32 (+0.05%)
     
  • Nasdaq

    16,387.85
    -11.67 (-0.07%)
     
  • Gold

    2,236.30
    +23.60 (+1.07%)
     
  • Crude Oil

    82.57
    +1.22 (+1.50%)
     
  • 10-Yr Bond

    4.1870
    -0.0090 (-0.21%)
     
  • FTSE Bursa Malaysia

    1,530.60
    -7.82 (-0.51%)
     
  • Jakarta Composite Index

    7,288.81
    -21.28 (-0.29%)
     
  • PSE Index

    6,903.53
    +5.36 (+0.08%)
     

Are AAK AB (publ)’s (STO:AAK) Interest Costs Too High?

Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like AAK AB (publ) (OM:AAK), with a market cap of KR33.53B, 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. Let’s take a look at AAK’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AAK here. Check out our latest analysis for AAK AB (publ.)

Does AAK generate enough cash through operations?

AAK has sustained its debt level by about KR2.99B over the last 12 months made up of current and long term debt. At this constant level of debt, AAK’s cash and short-term investments stands at KR480.00M for investing into the business. On top of this, AAK has produced KR1.10B in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 36.79%, meaning that AAK’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 AAK’s case, it is able to generate 0.37x cash from its debt capital.

Can AAK pay its short-term liabilities?

With current liabilities at KR5.84B, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.65x. Usually, for Food companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

OM:AAK Historical Debt May 27th 18
OM:AAK Historical Debt May 27th 18

Is AAK’s debt level acceptable?

AAK is a relatively highly levered company with a debt-to-equity of 44.45%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 AAK’s case, the ratio of 20.63x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving AAK ample headroom to grow its debt facilities.

Next Steps:

AAK’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 AAK’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 AAK has company-specific issues impacting its capital structure decisions. I recommend you continue to research AAK AB (publ.) to get a more holistic view of the mid-cap by looking at:

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

  2. Valuation: What is AAK 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 AAK 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.


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.