While small-cap stocks, such as Aehr Test Systems (NASDAQ:AEHR) with its market cap of US$54.66m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Semiconductor companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into AEHR here.
How does AEHR’s operating cash flow stack up against its debt?
Over the past year, AEHR has maintained its debt levels at around US$6.11m made up of current and long term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$15.06m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of AEHR’s operating efficiency ratios such as ROA here.
Does AEHR’s liquid assets cover its short-term commitments?
At the current liabilities level of US$6.59m liabilities, the company has been able to meet these commitments with a current assets level of US$30.44m, leading to a 4.62x current account ratio. Though, a ratio greater than 3x may be considered as too high, as AEHR could be holding too much capital in a low-return investment environment.
Does AEHR face the risk of succumbing to its debt-load?
With debt at 32.55% of equity, AEHR may be thought of as appropriately levered. AEHR is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with AEHR, and the company has plenty of headroom and ability to raise debt should it need to in the future.Next Steps:
AEHR’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 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 AEHR has company-specific issues impacting its capital structure decisions. You should continue to research Aehr Test Systems to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AEHR’s future growth? Take a look at our free research report of analyst consensus for AEHR’s outlook.
- Historical Performance: What has AEHR’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.