Investors are always looking for growth in small-cap stocks like accesso Technology Group plc (AIM:ACSO) with its market cap of USD $405 Million; however, an important fact which most ignore is: how financially healthy is the company? There are always disruptions which destabilize and many a times end an existing industry, and most small-cap companies are the first casualties when such a wave hits.
When a company is faced with an extreme event undercutting its profits or disrupting its operations temporarily, it’s the company’s ability to meet short-term obligations which allows it to remain in the business. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. See our latest analysis for ACSO
How does accesso Technology Group’s operating cash flow stack against its overall debt?
At the end of the day, a company must pay bills and salaries, and must be able to invest in lucrative projects through cash. Firms have a certain amount of control over revenue recognition, which makes an analysis of its operating cash flow even more important . Over the past year, accesso Technology Group’s operating cash flows stood at 89.5% of its overall debt. That means accesso Technology Group’s core operations are generating enough cash to comfortably service its debt.
Does ACSO’s cash and short-term assets cover its short-term commitments?
This is to test accesso Technology Group’s liquidity, which it may need due to a plethora of reasons that can derail the normal functioning of an organization in the short-term. It can be anything from natural calamity, political unrest, economic collapse, labor-strike, supply-chain disruption, or even a major factory breakdown, which can disrupt its normal functioning . However, banks, creditors, wages, and commitment to suppliers do not go away even during an extreme event. So, a company must maintain enough liquidity to meet its short-term obligations to survive. accesso Technology Group is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
Is accesso Technology Group’s level of debt at an acceptable level?
While ideally I reckon the debt-to equity ratio of a financially healthy company to be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For accesso Technology Group, the debt to equity ratio is 28.5% and that means accesso Technology Group hardly has any risk of facing a debt-overhang . While debt-to-equity ratio has several factors at play, an easier way to check whether it’s at a sustainable level is to check its ability to service the debt. A company generating earnings at least 5x of its interest payments is considered financially sound. In addition, with such a coverage ratio, the earnings remain more stable. In ACSO’s case the interest on debt is well covered by earnings (16.1x coverage).
These balance sheet checks are a fine starting point to decide whether a company is worth your consideration; however, its growth profile and track record are equally important in deciding whether it’s doing better than its peers. I recommend you see our latest FREE analysis on accesso Technology Group.