Is AMG Advanced Metallurgical Group NV (AMS:AMG) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like AMG Advanced Metallurgical Group NV (AMS:AMG), with a market cap of €1.2b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into AMG here.

How much cash does AMG generate through its operations?

AMG has built up its total debt levels in the last twelve months, from US$176m to US$377m – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$343m , ready to deploy into the business. Moreover, AMG has generated US$74m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 20%, indicating that AMG’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AMG’s case, it is able to generate 0.2x cash from its debt capital.

Does AMG’s liquid assets cover its short-term commitments?

Looking at AMG’s most recent US$374m liabilities, the company has been able to meet these obligations given the level of current assets of US$798m, with a current ratio of 2.14x. 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.

Can AMG service its debt comfortably?

With total debt exceeding equities, AMG is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether AMG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AMG's, case, the ratio of 9.12x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AMG ample headroom to grow its debt facilities.

Next Steps:

AMG’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. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I'm sure AMG has company-specific issues impacting its capital structure decisions. You should continue to research AMG Advanced Metallurgical Group to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for AMG’s future growth? Take a look at our free research report of analyst consensus for AMG’s outlook.
2. Valuation: What is AMG 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 AMG is currently mispriced by the market.
3. 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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.