Investors are always looking for growth in small-cap stocks like Alpha Peak Leisure Inc (CVE:AAP), with a market cap of CA$4.3m. However, an important fact which most ignore is: how financially healthy is the business? Given that AAP is not presently profitable, 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’d encourage you to dig deeper yourself into AAP here.
How does AAP’s operating cash flow stack up against its debt?
AAP has built up its total debt levels in the last twelve months, from CA$1.9m to CA$2.1m made up of predominantly near term debt. With this increase in debt, AAP currently has CA$2.5m remaining in cash and short-term investments 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of AAP’s operating efficiency ratios such as ROA here.
Does AAP’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$3.3m, it appears that the company may not be able to easily meet these obligations given the level of current assets of CA$2.7m, with a current ratio of 0.82x.
Can AAP service its debt comfortably?
With debt reaching 58% of equity, AAP may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since AAP is presently unprofitable, 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.
Next Steps:
AAP’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure AAP has company-specific issues impacting its capital structure decisions. I recommend you continue to research Alpha Peak Leisure to get a more holistic view of the stock by looking at:
- Historical Performance: What has AAP’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 editorial-team@simplywallst.com.