Investors are always looking for growth in small-cap stocks like LatAm Autos Limited (ASX:LAA), with a market cap of AU$54m. However, an important fact which most ignore is: how financially healthy is the business? Given that LAA is not presently profitable, it’s essential 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. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into LAA here.
How much cash does LAA generate through its operations?
Over the past year, LAA has ramped up its debt from AU$2.7m to AU$9.8m , which includes long-term debt. With this increase in debt, LAA currently has AU$5.7m remaining in cash and short-term investments , 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of LAA’s operating efficiency ratios such as ROA here.
Can LAA meet its short-term obligations with the cash in hand?
Looking at LAA’s AU$5.1m in current liabilities, the company has been able to meet these commitments with a current assets level of AU$9.1m, leading to a 1.8x current account ratio. For Interactive Media and Services 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 LAA face the risk of succumbing to its debt-load?
With debt reaching 55% of equity, LAA may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since LAA is currently unprofitable, 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.
Although LAA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around LAA’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 LAA has company-specific issues impacting its capital structure decisions. I suggest you continue to research LatAm Autos to get a better picture of the small-cap by looking at:
- Historical Performance: What has LAA’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.