Investors are always looking for growth in small-cap stocks like Adams Resources & Energy Inc (AMEX:AE), with a market cap of USD $180.93M. However, an important fact which most ignore is: how financially healthy is the company? The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for Adams Resources & Energy
Does AE generate enough cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of AE, operating cash flow over the past twelve months do cover its current debt, which means AE generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company. This is great news for both debtholders and shareholders, as the company exhibits cautious cash and debt management.
Can AE meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, AE may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that AE is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Is AE’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For AE, the debt-to-equity ratio is 1.23%, which means debt is low and does not pose any significant threat to the company’s operations. We can test if AE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. AE’s interest on debt is not strongly covered by earnings as it sits at around 2.53x. This means lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Are you a shareholder? AE’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. In the future, its financial position may change. I recommend keeping on top of market expectations for AE’s future growth on our free analysis platform.
Are you a potential investor? AE’s relatively safe debt levels is even more impressive due to its ability to generate high cash flow, which illustrates operating efficiency. In addition, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more confidence in the stock, you need to further examine AE’s track record. I encourage you to continue your research by taking a look at AE’s past performance analysis on our free platform to conclude on AE’s financial health.
To help readers see pass 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.