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Investors are always looking for growth in small-cap stocks like Acushnet Holdings Corp. (NYSE:GOLF), with a market cap of US$1.7b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, 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, this commentary is still very high-level, so I suggest you dig deeper yourself into GOLF here.
Does GOLF produce enough cash relative to debt?
GOLF has shrunken its total debt levels in the last twelve months, from US$464m to US$406m , which also accounts for long term debt. With this debt payback, GOLF currently has US$56m remaining in cash and short-term investments for investing into the business. Additionally, GOLF has generated US$121m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 30%, meaning that GOLF’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GOLF’s case, it is able to generate 0.3x cash from its debt capital.
Can GOLF meet its short-term obligations with the cash in hand?
Looking at GOLF’s US$327m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.17x. Usually, for Leisure companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is GOLF’s debt level acceptable?
With a debt-to-equity ratio of 44%, GOLF can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if GOLF’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 GOLF, the ratio of 9.98x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as GOLF’s high interest coverage is seen as responsible and safe practice.
Although GOLF’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around GOLF’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure GOLF has company-specific issues impacting its capital structure decisions. I suggest you continue to research Acushnet Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GOLF’s future growth? Take a look at our free research report of analyst consensus for GOLF’s outlook.
- Valuation: What is GOLF 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 GOLF 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.
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.