Advanced Braking Technology Limited (ASX:ABV) is a small-cap stock with a market capitalization of AU$11.12M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Since ABV is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into ABV here.
Does ABV generate an acceptable amount of cash through operations?
ABV has shrunken its total debt levels in the last twelve months, from AU$1.95M to AU$1.37M – this includes both the current and long-term debt. With this reduction in debt, ABV’s cash and short-term investments stands at AU$1.73M , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of ABV’s operating efficiency ratios such as ROA here.
Can ABV pay its short-term liabilities?
At the current liabilities level of AU$2.00M liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$5.91M, leading to a 2.95x current account ratio. For Auto Components companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ABV face the risk of succumbing to its debt-load?
With debt at 38.35% of equity, ABV may be thought of as appropriately levered. ABV is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with ABV, and the company has plenty of headroom and ability to raise debt should it need to in the future.Next Steps:
ABV’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how ABV has been performing in the past. I recommend you continue to research Advanced Braking Technology to get a more holistic view of the stock by looking at:
- Historical Performance: What has ABV’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.