Investors are always looking for growth in small-cap stocks like Alaska Communications Systems Group Inc (NASDAQ:ALSK) with its market cap of USD $119 Million. However, an important fact which most ignore is: how financially healthy is the company? The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone.
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. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Alaska Communications Systems Group
Does ALSK generate enough cash through operations to meet all its needs?
While in short-term operating cash flows can be volatile, on an annual basis, they reflect the true picture of a company’s earnings quality and its ability to meet obligations. For Alaska Communications Systems Group the ratio of operating cash flow to overall debt stands at 20.6%. That means Alaska Communications Systems Group’s core operations are generating enough cash to comfortably service its debt.
Can ALSK pay its short-term debts?
There are many problems that come unannounced. For instance, a hurricane or even labor strikes. In 2011, a Tsunami and earthquake in Japan had wiped out a significant chunk of auto supply chain in the country. If these were not Japan’s biggest automakers and electronics-maker with big cash reserves and funding sources, it’s hard to imagine how would they have recovered. But that does not absolve the company from its obligations such as lease payments, interest payments, and salaries. In addition, failure to service debt and bank loans can seriously hurts its reputation, making funding extremely expensive in the future, if at all it survives. Alaska Communications Systems Group is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
Is Alaska Communications Systems Group’s level of debt at an acceptable level?
A substantially higher-debt poses a significant threat to a company’s profitability during a downturn. Alaska Communications Systems Group’s debt to equity ratio stands at 113% and this indicates that the company is holding a high level of debt / liabilities compared to its net worth, and in the event of financial stress may experience difficulty meeting debt or interest obligations. A more empirical and universal test is to measure the interest payments against earnings of a company. In an ideal situation, earnings should cover interest by at least a 5x multiple; thus, reducing any concerns related to high volatility in net income due to small fluctuations in operating performance. In ALSK’s case the interest on debt is not strongly covered (ideally 5x) by earnings (earnings are 0.2x annual interest expense).
Alaska Communications Systems Group currently generates healthy operating cash flows. However, the company’s debt to equity ratio is higher than I’d like, and it’s earnings compared to its interest costs are still not at a level ideally expected from a financially strong company.
Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on Alaska Communications Systems Group to see what are ALSK’s growth prospects and whether it could be considered an undervalued opportunity.
PS. If you are not interested in Alaska Communications Systems Group anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.