Arowana International Limited (ASX:AWN), with a market capitalization of USD $87 Million, is considered a small-cap company. Although such businesses are the ones which could grow the most, they are also highly prone to a downturn in the country’s economy or even a specific region. It’s low debt-to-equity ratio of 1.7% does make it look financially sound, but we must also check how its cash flows and earnings stand against its debt.
Primarily due to the lack of diversification in revenues geographically, often investors opt for a bundle of small-caps. While savvy investors aren’t wrong in looking for singular blockbuster opportunities and trying to achieve diversification on their own by allocating a small part of their portfolio capital to small-caps, that doesn’t make these investments less risky individually. However, to help you reduce that risk, I’m going to provide you with few basic aspects other than debt-to-equity ratio to gauge a ballpark estimate on how financially strong is the company. Check out our latest analysis for Arowana International
Has Arowana International got enough cash to weather a storm?
Despite low debt, for Arowana International to continue operations during a downturn, it needs a sound liquidity position. When evaluating financial strength, I compare a company’s current assets (cash and liquid assets) to its total debt. AWN’s current assets of $38M cover the company’s total debt of $2M, indicating that the company is in a sound position to pay-down its debt when needed or favourable.
Do AWN’s earnings provide enough cushion to meet its debt obligations?
Another key metric that investors should consider is how Arowana International’s earnings stack up against its debt. While both of these figures are taken from the income statement, they highlight a key aspect of financial strength: how much a company earns compared to its interest outflows.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 AWN’s case the company is making a loss, therefore interest on debt is not well covered by earnings.
With such low debt on its balance sheet, while Arowana International appeared to be a financially healthy company, its operating cash flows and earnings tell a different story. It needs to do a lot of work on its profitability and operational efficiency to be designated as 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 Arowana International to see what are AWN’s growth prospects and whether it could be considered an undervalued opportunity.
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