While small-cap stocks, such as Alaska Communications Systems Group Inc (NASDAQ:ALSK) with its market cap of US$103.7m, 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 Telecom industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into ALSK here.
How does ALSK’s operating cash flow stack up against its debt?
ALSK has sustained its debt level by about US$180.2m over the last 12 months comprising of short- and long-term debt. At this current level of debt, ALSK’s cash and short-term investments stands at US$10.4m , ready to deploy into the business. On top of this, ALSK has produced US$35.7m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 19.8%, indicating that ALSK’s operating cash is not sufficient to cover its debt. 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 0.2x cash from its debt capital.
Does ALSK’s liquid assets cover its short-term commitments?
With current liabilities at US$47.3m, it appears that the company has been able to meet these obligations given the level of current assets of US$64.4m, with a current ratio of 1.36x. Generally, for Telecom companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ALSK service its debt comfortably?
Since total debt levels have outpaced equities, ALSK is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether ALSK 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 ALSK’s, case, the ratio of 1.57x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ALSK’s low interest coverage already puts the company at higher risk of default.Next Steps:
ALSK’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 ALSK has company-specific issues impacting its capital structure decisions. You should continue to research Alaska Communications Systems Group to get a more holistic view of the stock 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.