Is Air Transport Services Group, Inc.’s (NASDAQ:ATSG) Balance Sheet Strong Enough To Weather A Storm?

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Air Transport Services Group, Inc. (NASDAQ:ATSG) is a small-cap stock with a market capitalization of US$1.4b. 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? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into ATSG here.

How does ATSG’s operating cash flow stack up against its debt?

ATSG has sustained its debt level by about US$542m over the last 12 months including long-term debt. At this current level of debt, ATSG currently has US$43m remaining in cash and short-term investments for investing into the business. Moreover, ATSG has produced US$245m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 45%, signalling that ATSG’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ATSG’s case, it is able to generate 0.45x cash from its debt capital.

Can ATSG pay its short-term liabilities?

At the current liabilities level of US$174m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.02x. For Logistics companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NASDAQGS:ATSG Historical Debt February 1st 19
NASDAQGS:ATSG Historical Debt February 1st 19

Does ATSG face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, ATSG is a highly 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 check to see whether ATSG 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 ATSG’s, case, the ratio of 7.28x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ATSG’s high interest coverage is seen as responsible and safe practice.

Next Steps:

ATSG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how ATSG has been performing in the past. You should continue to research Air Transport Services Group to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ATSG’s future growth? Take a look at our free research report of analyst consensus for ATSG’s outlook.
  2. Valuation: What is ATSG 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 ATSG is currently mispriced by the market.
  3. 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.