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Is Acushnet Holdings Corp.'s (NYSE:GOLF) Balance Sheet A Threat To Its Future?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Acushnet Holdings Corp. (NYSE:GOLF), with a market cap of US$2.0b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into GOLF here.

GOLF’s Debt (And Cash Flows)

GOLF has sustained its debt level by about US$566m over the last 12 months including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$43m to keep the business going. On top of this, GOLF has produced US$161m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 28%, meaning that GOLF’s debt is appropriately covered by operating cash.

Does GOLF’s liquid assets cover its short-term commitments?

Looking at GOLF’s US$430m in current liabilities, the company has been able to meet these commitments with a current assets level of US$813m, leading to a 1.89x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Leisure 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.

NYSE:GOLF Historical Debt, July 12th 2019

Is GOLF’s debt level acceptable?

GOLF is a relatively highly levered company with a debt-to-equity of 55%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if GOLF’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 GOLF, the ratio of 8.38x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving GOLF ample headroom to grow its debt facilities.

Next Steps:

Although GOLF’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 GOLF's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for GOLF's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Acushnet Holdings to get a more holistic view of the small-cap by looking at:

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

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 editorial-team@simplywallst.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.