While small-cap stocks, such as Avesoro Resources Inc (TSE:ASO) with its market cap of CA$251m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since ASO is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into ASO here.
How does ASO’s operating cash flow stack up against its debt?
ASO has built up its total debt levels in the last twelve months, from US$120m to US$134m – this includes both the current and long-term debt. With this growth in debt, ASO currently has US$13m remaining in cash and short-term investments for investing into the business. Additionally, ASO has generated cash from operations of US$66m during the same period of time, leading to an operating cash to total debt ratio of 49%, indicating that ASO’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In ASO’s case, it is able to generate 0.49x cash from its debt capital.
Can ASO meet its short-term obligations with the cash in hand?
At the current liabilities level of US$89m liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$87m, leading to a current ratio of 0.98x.
Can ASO service its debt comfortably?
Since total debt levels have outpaced equities, ASO is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since ASO is presently 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.
Although ASO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure ASO has company-specific issues impacting its capital structure decisions. You should continue to research Avesoro Resources to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ASO’s future growth? Take a look at our free research report of analyst consensus for ASO’s outlook.
- Valuation: What is ASO 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 ASO 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.