Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Alumetal S.A. (WSE:AML) is a small-cap stock with a market capitalization of zł641m. 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? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. 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 sustained its debt level by about zł139m over the last 12 months which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at zł18m for investing into the business. Additionally, AML has produced cash from operations of zł103m in the last twelve months, resulting in an operating cash to total debt ratio of 74%, meaning that AML’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AML’s case, it is able to generate 0.74x cash from its debt capital.
Can AML pay its short-term liabilities?
Looking at AML’s zł293m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of zł492m, with a current ratio of 1.68x. Generally, for Metals and Mining companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does AML face the risk of succumbing to its debt-load?
With debt at 26% of equity, AML may be thought of as appropriately levered. AML is not taking on too much debt commitment, which may be constraining for future growth. 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 49.23x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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. Furthermore, 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 more holistic view of the stock by looking at:
- 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.
- 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.
- 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.