Investors are always looking for growth in small-cap stocks like Arvida Group Limited (NZSE:ARV), with a market cap of NZ$538m. However, an important fact which most ignore is: how financially healthy is the business? Healthcare companies, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into ARV here.
How much cash does ARV generate through its operations?
ARV has built up its total debt levels in the last twelve months, from NZ$74m to NZ$123m – this includes long-term debt. With this rise in debt, ARV’s cash and short-term investments stands at NZ$3.1m for investing into the business. Moreover, ARV has produced cash from operations of NZ$54m over the same time period, leading to an operating cash to total debt ratio of 44%, signalling that ARV’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ARV’s case, it is able to generate 0.44x cash from its debt capital.
Does ARV’s liquid assets cover its short-term commitments?
At the current liabilities level of NZ$122m, it appears that the company may not have an easy time meeting these commitments with a current assets level of NZ$24m, leading to a current ratio of 0.2x.
Can ARV service its debt comfortably?
With a debt-to-equity ratio of 24%, ARV’s debt level may be seen as prudent. This range is considered safe as ARV is not taking on too much debt obligation, 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 10.43x suggests that interest is comfortably covered, which means that lenders may be less hesitant 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. However, 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. You should 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.
- Historical Performance: What has ARV’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 email@example.com.