While small-cap stocks, such as Appliance Recycling Centers of America Inc (NASDAQ:ARCI) with its market cap of US$5.36M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into ARCI here.
How does ARCI’s operating cash flow stack up against its debt?
Over the past year, ARCI has reduced its debt from US$18.49M to US$15.25M , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$968.00K for investing into the business. Moreover, ARCI has produced US$2.66M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 17.43%, signalling that ARCI’s operating cash is not sufficient to cover its debt. 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.
Does ARCI’s liquid assets cover its short-term commitments?
At the current liabilities level of US$27.46M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$28.55M, with a current ratio of 1.04x. Generally, for Specialty Retail 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.
Can ARCI service its debt comfortably?With a debt-to-equity ratio of 15.07%, ARCI’s debt level may be seen as prudent. This range is considered safe as ARCI is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if ARCI’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 ARCI, the ratio of 1.71x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
ARCI’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. 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 recommend you continue to research Appliance Recycling Centers of America to get a better picture of the stock by looking at:
- 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.
- 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.
- 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.