How Financially Strong Is Alumetal SA (WSE:AML)?

Alumetal SA (WSE:AML) is a small-cap stock with a market capitalization of zł673m. 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? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into AML here.

Does AML produce enough cash relative to debt?

AML has shrunken its total debt levels in the last twelve months, from zł156m to zł147m – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at zł44m for investing into the business. Additionally, AML has generated cash from operations of zł95m in the last twelve months, resulting in an operating cash to total debt ratio of 64%, indicating that AML’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 AML’s case, it is able to generate 0.64x cash from its debt capital.

Can AML pay its short-term liabilities?

Looking at AML’s most recent zł355m liabilities, it appears that the company has been able to meet these commitments with a current assets level of zł537m, leading to a 1.51x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

WSE:AML Historical Debt October 23rd 18
WSE:AML Historical Debt October 23rd 18

Does AML face the risk of succumbing to its debt-load?

AML’s level of debt is appropriate relative to its total equity, at 29%. This range is considered safe as AML is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether AML 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 AML’s, case, the ratio of 101x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as AML’s high interest coverage is seen as responsible and safe practice.

Next Steps:

AML’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for AML’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Alumetal to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for AML’s future growth? Take a look at our free research report of analyst consensus for AML’s outlook.
  2. Valuation: What is AML 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 AML 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.