ALS Limited (ASX:ALQ) is a small-cap stock with a market capitalization of AU$3.9b. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into ALQ here.
ALQ’s Debt (And Cash Flows)
Over the past year, ALQ has maintained its debt levels at around AU$740m which accounts for long term debt. At this current level of debt, ALQ’s cash and short-term investments stands at AU$153m to keep the business going. Additionally, ALQ has generated AU$216m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 29%, signalling that ALQ’s operating cash is sufficient to cover its debt.
Does ALQ’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$527m, it appears that the company has been able to meet these commitments with a current assets level of AU$628m, leading to a 1.19x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Professional Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ALQ face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 67%, ALQ can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether ALQ is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ALQ’s, case, the ratio of 10.11x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ALQ ample headroom to grow its debt facilities.
ALQ’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 ALQ’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 ALQ has company-specific issues impacting its capital structure decisions. I suggest you continue to research ALS to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALQ’s future growth? Take a look at our free research report of analyst consensus for ALQ’s outlook.
- Valuation: What is ALQ 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 ALQ 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.