Investors are always looking for growth in small-cap stocks like Avesoro Resources Inc (TSE:ASO), with a market cap of CA$375.25m. However, an important fact which most ignore is: how financially healthy is the business? Since ASO is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ASO here.
How much cash does ASO generate through its operations?
ASO’s debt levels surged from CA$105.63m to CA$141.88m over the last 12 months – this includes both the current and long-term debt. With this increase in debt, ASO’s cash and short-term investments stands at CA$17.79m for investing into the business. Moreover, ASO has produced CA$10.97m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 7.73%, indicating that ASO’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational 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 0.077x cash from its debt capital.
Does ASO’s liquid assets cover its short-term commitments?
Looking at ASO’s most recent CA$91.90m liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.89x, which is below the prudent industry ratio of 3x.
Is ASO’s debt level acceptable?With debt reaching 91.27% of equity, ASO 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. However, since ASO is currently loss-making, 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.
ASO’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, 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. I suggest you continue to research Avesoro Resources to get a better picture 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.