Is ASV Holdings Inc’s (NASDAQ:ASV) Balance Sheet A Threat To Its Future?

While small-cap stocks, such as ASV Holdings Inc (NASDAQ:ASV) with its market cap of US$83.40M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, 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. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into ASV here.

How does ASV’s operating cash flow stack up against its debt?

Over the past year, ASV has reduced its debt from US$48.33M to US$44.87M – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$572.00K , ready to deploy into the business. Additionally, ASV has produced US$2.42M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 5.39%, indicating that ASV’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ASV’s case, it is able to generate 0.054x cash from its debt capital.

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

At the current liabilities level of US$23.65M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$47.56M, leading to a 2.01x current account ratio. Generally, for Machinery companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

NasdaqCM:ASV Historical Debt Mar 7th 18
NasdaqCM:ASV Historical Debt Mar 7th 18

Can ASV service its debt comfortably?

With debt at 37.99% of equity, ASV may be thought of as appropriately levered. This range is considered safe as ASV is not taking on too much debt obligation, which may be constraining for future growth. We can test if ASV’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 ASV, the ratio of 1.67x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ASV’s low interest coverage already puts the company at higher risk of default.

Next Steps:

ASV’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for ASV’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research ASV Holdings to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.