While small-cap stocks, such as Ascendant Resources Inc (TSE:ASND) with its market cap of CA$47m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into ASND here.
Does ASND produce enough cash relative to debt?
ASND has built up its total debt levels in the last twelve months, from US$1.5m to US$3.8m made up of predominantly near term debt. With this growth in debt, ASND’s cash and short-term investments stands at US$7.4m , ready to deploy into the business. On top of this, ASND has generated cash from operations of US$22m over the same time period, leading to an operating cash to total debt ratio of 596%, meaning that ASND’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ASND’s case, it is able to generate 5.96x cash from its debt capital.
Does ASND’s liquid assets cover its short-term commitments?
With current liabilities at US$24m, it seems that the business has been able to meet these obligations given the level of current assets of US$25m, with a current ratio of 1.03x. For Metals and Mining 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.
Can ASND service its debt comfortably?
ASND’s level of debt is appropriate relative to its total equity, at 15%. ASND is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if ASND’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For ASND, the ratio of 8.15x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
ASND’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure ASND has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ascendant Resources to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ASND’s future growth? Take a look at our free research report of analyst consensus for ASND’s outlook.
- Valuation: What is ASND worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ASND is currently mispriced by the market.
- 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 email@example.com.