While small-cap stocks, such as The Alumasc Group plc (LON:ALU) with its market cap of UK£37m, 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into ALU here.
ALU’s Debt (And Cash Flows)
ALU has built up its total debt levels in the last twelve months, from UK£3.0m to UK£6.0m , which includes long-term debt. With this increase in debt, ALU currently has UK£5.7m remaining in cash and short-term investments to keep the business going. Additionally, ALU has generated cash from operations of UK£6.0m during the same period of time, leading to an operating cash to total debt ratio of 100%, signalling that ALU’s current level of operating cash is high enough to cover debt.
Can ALU meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£18m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.75x. The current ratio is calculated by dividing current assets by current liabilities. For Building companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ALU service its debt comfortably?
With a debt-to-equity ratio of 23%, ALU's debt level may be seen as prudent. This range is considered safe as ALU is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if ALU’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 ALU, the ratio of 12x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ALU ample headroom to grow its debt facilities.
ALU’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how ALU has been performing in the past. I suggest you continue to research Alumasc Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALU’s future growth? Take a look at our free research report of analyst consensus for ALU’s outlook.
- Historical Performance: What has ALU'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.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
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