While small-cap stocks, such as Australia United Mining Limited (ASX:AYM) with its market cap of AU$5.08M, 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 AYM is not presently profitable, it’s vital to evaluate 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, I know these factors are very high-level, so I recommend you dig deeper yourself into AYM here.
Does AYM generate enough cash through operations?
AYM has shrunken its total debt levels in the last twelve months, from AU$1.63M to AU$942.04K , which comprises of short- and long-term debt. With this debt payback, AYM’s cash and short-term investments stands at AU$450.59K , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 examine some of AYM’s operating efficiency ratios such as ROA here.
Does AYM’s liquid assets cover its short-term commitments?
Looking at AYM’s most recent AU$146.49K liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$489.25K, with a current ratio of 3.34x. However, anything above 3x is considered high and could mean that AYM has too much idle capital in low-earning investments.
Can AYM service its debt comfortably?With a debt-to-equity ratio of 71.27%, AYM 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. Though, since AYM is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
At its current level of cash flow coverage, AYM has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how AYM has been performing in the past. You should continue to research Australia United Mining to get a better picture of the stock by looking at:
- Historical Performance: What has AYM’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.