Arena Events Group plc (LON:ARE) is a small-cap stock with a market capitalization of UK£88m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that ARE is not presently profitable, it’s crucial to understand 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ARE here.
How does ARE’s operating cash flow stack up against its debt?
ARE's debt levels have fallen from UK£53m to UK£24m over the last 12 months – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at UK£6.5m for investing into the business. Additionally, ARE has generated cash from operations of UK£1.1m over the same time period, resulting in an operating cash to total debt ratio of 4.7%, meaning that ARE’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In ARE’s case, it is able to generate 0.047x cash from its debt capital.
Can ARE pay its short-term liabilities?
With current liabilities at UK£42m, it seems that the business may not have an easy time meeting these commitments with a current assets level of UK£41m, leading to a current ratio of 0.97x.
Is ARE’s debt level acceptable?
With a debt-to-equity ratio of 43%, ARE can be considered as an above-average 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 ARE 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’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for ARE's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Arena Events Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARE’s future growth? Take a look at our free research report of analyst consensus for ARE’s outlook.
- Historical Performance: What has ARE'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.
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 firstname.lastname@example.org.