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Actuant Corporation (NYSE:ATU) 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? Given that ATU is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into ATU here.
ATU’s Debt (And Cash Flows)
ATU has shrunk its total debt levels in the last twelve months, from US$547m to US$486m , which also accounts for long term debt. With this debt repayment, ATU currently has US$170m remaining in cash and short-term investments , ready to be used for running the business. Additionally, ATU has generated cash from operations of US$77m in the last twelve months, leading to an operating cash to total debt ratio of 16%, signalling that ATU’s current level of operating cash is not high enough to cover debt.
Does ATU’s liquid assets cover its short-term commitments?
Looking at ATU’s US$278m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.35x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ATU face the risk of succumbing to its debt-load?
With debt reaching 83% of equity, ATU may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since ATU is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
ATU’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. Since there is also no concerns around ATU's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure ATU has company-specific issues impacting its capital structure decisions. I suggest you continue to research Actuant to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ATU’s future growth? Take a look at our free research report of analyst consensus for ATU’s outlook.
- Valuation: What is ATU 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 ATU 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.