While small-cap stocks, such as Acadian Timber Corp. (TSE:ADN) with its market cap of CA$283m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ADN here.
How does ADN’s operating cash flow stack up against its debt?
ADN’s debt levels surged from CA$91m to CA$97m over the last 12 months , which includes long-term debt. With this rise in debt, ADN currently has CA$22m remaining in cash and short-term investments , ready to deploy into the business. Moreover, ADN has produced CA$16m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 17%, signalling that ADN’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ADN’s case, it is able to generate 0.17x cash from its debt capital.
Does ADN’s liquid assets cover its short-term commitments?
With current liabilities at CA$13m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.42x. Generally, for Forestry 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 ADN service its debt comfortably?
ADN’s level of debt is appropriate relative to its total equity, at 33%. ADN is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if ADN’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 ADN, the ratio of 5.39x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ADN ample headroom to grow its debt facilities.
ADN’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, 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 ADN has company-specific issues impacting its capital structure decisions. You should continue to research Acadian Timber to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ADN’s future growth? Take a look at our free research report of analyst consensus for ADN’s outlook.
- Valuation: What is ADN 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 ADN 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.
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