What You Must Know About Appliance Recycling Centers of America Inc's (NASDAQ:ARCI) Financial Strength

Appliance Recycling Centers of America Inc (NASDAQ:ARCI) is a small-cap stock with a market capitalization of $7.77M. 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? Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ARCI here.

Does ARCI generate enough cash through operations?

ARCI's debt levels have fallen from $18.5M to $15.3M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, ARCI currently has $1.0M remaining in cash and short-term investments , ready to deploy into the business. Additionally, ARCI has produced $2.7M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 17.43%, indicating that ARCI’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ARCI’s case, it is able to generate 0.17x cash from its debt capital.

Can ARCI meet its short-term obligations with the cash in hand?

With current liabilities at $27.5M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.04x. Generally, for Specialty Retail companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can ARCI service its debt comfortably?

With debt at 15.07% of equity, ARCI may be thought of as appropriately levered. This range is considered safe as ARCI is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether ARCI 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 ARCI's, case, the ratio of 1.71x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ARCI’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Although ARCI’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I'm sure ARCI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Appliance Recycling Centers of America to get a more holistic view of the stock by looking at:

1. Valuation: What is ARCI 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 ARCI is currently mispriced by the market.

2. Historical Performance: What has ARCI'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.

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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.