Investors are always looking for growth in small-cap stocks like Ardmore Shipping Corporation (NYSE:ASC), with a market cap of US$255m. However, an important fact which most ignore is: how financially healthy is the business? Since ASC is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into ASC here.
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ASC’s Debt (And Cash Flows)
ASC has sustained its debt level by about US$449m over the last 12 months including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$52m to keep the business going. On top of this, ASC has generated cash from operations of US$6.0m during the same period of time, resulting in an operating cash to total debt ratio of 1.3%, signalling that ASC’s debt is not covered by operating cash.
Can ASC pay its short-term liabilities?
With current liabilities at US$62m, it appears that the company has been able to meet these commitments with a current assets level of US$96m, leading to a 1.56x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ASC face the risk of succumbing to its debt-load?
ASC is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since ASC is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
ASC’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 ASC’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how ASC has been performing in the past. I suggest you continue to research Ardmore Shipping to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ASC’s future growth? Take a look at our free research report of analyst consensus for ASC’s outlook.
- Valuation: What is ASC 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 ASC is currently mispriced by the market.
- 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.
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