Alaska Communications Systems Group, Inc. (NASDAQ:ALSK) is a small-cap stock with a market capitalization of US$86m. 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 Telecom industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ALSK here.
Does ALSK produce enough cash relative to debt?
Over the past year, ALSK has reduced its debt from US$188m to US$172m , which also accounts for long term debt. With this debt payback, ALSK currently has US$17m remaining in cash and short-term investments for investing into the business. On top of this, ALSK has produced cash from operations of US$52m over the same time period, resulting in an operating cash to total debt ratio of 30%, signalling that ALSK’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ALSK’s case, it is able to generate 0.3x cash from its debt capital.
Can ALSK meet its short-term obligations with the cash in hand?
Looking at ALSK’s US$50m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$61m, with a current ratio of 1.24x. For Telecom companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ALSK service its debt comfortably?
With total debt exceeding equities, ALSK is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In ALSK’s case, the ratio of 1.78x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
Although ALSK’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 ALSK’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ALSK’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Alaska Communications Systems Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALSK’s future growth? Take a look at our free research report of analyst consensus for ALSK’s outlook.
- Valuation: What is ALSK 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 ALSK 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 editorial-team@simplywallst.com.