Investors are always looking for growth in small-cap stocks like Azarga Metals Corp (TSXV:AZR), with a market cap of CA$6.29M. However, an important fact which most ignore is: how financially healthy is the business? Given that AZR is not presently profitable, 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. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into AZR here.
Does AZR generate an acceptable amount of cash through operations?
AZR’s debt levels have fallen from CA$1.0M to CA$1.0M over the last 12 months , which is made up of current and long term debt. With this debt repayment, AZR currently has CA$0.0M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of AZR’s operating efficiency ratios such as ROA here.
Can AZR pay its short-term liabilities?
With current liabilities at CA$0.2M, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.35x, which is below the prudent industry ratio of 3x.
Can AZR service its debt comfortably?
AZR is a relatively highly levered company with a debt-to-equity of 57.71%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since AZR 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.Next Steps:
AZR’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. This is only a rough assessment of financial health, and I’m sure AZR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Azarga Metals to get a better picture of the stock by looking at:
- 1. Historical Performance: What has AZR’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.
- 2. 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.