While small-cap stocks, such as Amarillo Gold Corporation (TSXV:AGC) with its market cap of CA$23.76M, 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 AGC is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into AGC here.
Does AGC generate enough cash through operations?
Over the past year, AGC has ramped up its debt from CA$6.5M to CA$8.7M , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at CA$1.5M , ready to deploy into the business. Though 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of AGC’s operating efficiency ratios such as ROA here.
Can AGC meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$1.7M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.32x. Usually, for metals and mining companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is AGC’s level of debt at an acceptable level?AGC is a relatively highly levered company with a debt-to-equity of 52.27%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since AGC 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.
Are you a shareholder? At its current level of cash flow coverage, AGC has room for improvement to better cushion for events which may require debt repayment. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that AGC’s financial situation may change. You should always be keeping on top of market expectations for AGC’s future growth on our free analysis platform.
Are you a potential investor? AGC’s high debt levels along with poor cash coverage as well as low liquidity coverage of short-term expenses may send potential investors running the other way. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of AGC’s track record. You should continue your analysis by taking a look at AGC’s past performance analysis on our free platform to figure out AGC’s financial health position.