Arvida Group Limited (NZSE:ARV) is a small-cap stock with a market capitalization of NZ$538m. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into ARV here.
ARV’s Debt (And Cash Flows)
ARV has built up its total debt levels in the last twelve months, from NZ$110m to NZ$151m , which includes long-term debt. With this rise in debt, ARV currently has NZ$2.5m remaining in cash and short-term investments , ready to be used for running the business. On top of this, ARV has produced NZ$65m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 43%, indicating that ARV’s debt is appropriately covered by operating cash.
Does ARV’s liquid assets cover its short-term commitments?
With current liabilities at NZ$27m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.94x. The current ratio is calculated by dividing current assets by current liabilities.
Does ARV face the risk of succumbing to its debt-load?
With debt at 28% of equity, ARV may be thought of as appropriately levered. ARV is not taking on too much debt commitment, which may be constraining for future growth. We can test if ARV’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 ARV, the ratio of 6.15x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as ARV’s high interest coverage is seen as responsible and safe practice.
ARV’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure ARV has company-specific issues impacting its capital structure decisions. I suggest you continue to research Arvida Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARV’s future growth? Take a look at our free research report of analyst consensus for ARV’s outlook.
- Valuation: What is ARV 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 ARV is currently mispriced by the market.
- 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.