While small-cap stocks, such as Alexium International Group Limited (ASX:AJX) with its market cap of AU$39.82m, 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 AJX is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into AJX here.
Does AJX produce enough cash relative to debt?
AJX has built up its total debt levels in the last twelve months, from AU$57.08k to AU$0 – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$3.41m 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of AJX’s operating efficiency ratios such as ROA here.
Does AJX’s liquid assets cover its short-term commitments?
Looking at AJX’s most recent AU$7.98m liabilities, it seems that the business has not been able to meet these commitments with a current assets level of AU$7.03m, leading to a 0.88x current account ratio. which is under the appropriate industry ratio of 3x.
Does AJX face the risk of succumbing to its debt-load?AJX is a relatively highly levered company with a debt-to-equity of 85.89%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since AJX is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
AJX’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for AJX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Alexium International Group to get a more holistic view of the stock by looking at:
- Historical Performance: What has AJX’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.