While small-cap stocks, such as Advanced Braking Technology Limited (ASX:ABV) with its market cap of AU$5.3m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that ABV is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into ABV here.
How much cash does ABV generate through its operations?
ABV’s debt levels surged from AU$1.4m to AU$1.9m over the last 12 months – this includes long-term debt. With this rise in debt, ABV currently has AU$627k remaining in cash and short-term investments for investing 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. For this article’s sake, I won’t be looking at this today, but you can assess some of ABV’s operating efficiency ratios such as ROA here.
Does ABV’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$3.2m, it seems that the business has been able to meet these obligations given the level of current assets of AU$4.4m, with a current ratio of 1.37x. For Auto Components companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does ABV face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 81%, ABV can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since ABV is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
ABV’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 ABV’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure ABV has company-specific issues impacting its capital structure decisions. I suggest you continue to research Advanced Braking Technology to get a more holistic view of the small-cap 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.