While small-cap stocks, such as Ambition Group Limited (ASX:AMB) with its market cap of AU$7.3m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since AMB is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I recommend you dig deeper yourself into AMB here.
How much cash does AMB generate through its operations?
AMB has increased its debt level by about AU$2.0m over the last 12 months , which is mainly comprised of near term debt. With this increase in debt, AMB’s cash and short-term investments stands at AU$3.7m , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of AMB’s operating efficiency ratios such as ROA here.
Can AMB pay its short-term liabilities?
At the current liabilities level of AU$12m, it seems that the business has been able to meet these commitments with a current assets level of AU$22m, leading to a 1.94x current account ratio. 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 AMB face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 17%, AMB’s debt level may be seen as prudent. AMB is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for AMB, and the company also has the ability and headroom to increase debt if needed going forward.
AMB has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure AMB has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ambition Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMB’s future growth? Take a look at our free research report of analyst consensus for AMB’s outlook.
- Historical Performance: What has AMB’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 email@example.com.