Are LatAm Autos Limited’s (ASX:LAA) Interest Costs Too High?

While small-cap stocks, such as LatAm Autos Limited (ASX:LAA) with its market cap of AU$72.28m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Internet companies, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into LAA here.

How much cash does LAA generate through its operations?

Over the past year, LAA has borrowed debt capital of around AU$9.12m made up of current and long term debt. With this increase in debt, LAA’s cash and short-term investments stands at AU$6.79m for investing 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 assess 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 most recent AU$4.41m liabilities, the company has been able to meet these commitments with a current assets level of AU$11.15m, leading to a 2.53x current account ratio. Generally, for Internet companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

ASX:LAA Historical Debt July 19th 18
ASX:LAA Historical Debt July 19th 18

Can LAA service its debt comfortably?

With a debt-to-equity ratio of 46.80%, LAA can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since LAA is currently 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.

Next Steps:

LAA’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. 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 stock by looking at:

  1. 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.
  2. 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.