Is AdvanSix Inc (NYSE:ASIX) A Financially Sound Company?
While small-cap stocks, such as AdvanSix Inc (NYSE:ASIX) with its market cap of US$1.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about 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, this commentary is still very high-level, so I suggest you dig deeper yourself into ASIX here.
How does ASIX’s operating cash flow stack up against its debt?
ASIX has shrunken its total debt levels in the last twelve months, from US$265m to US$210m , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at US$17m for investing into the business. Moreover, ASIX has generated US$151m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 72%, meaning that ASIX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ASIX’s case, it is able to generate 0.72x cash from its debt capital.
Can ASIX pay its short-term liabilities?
At the current liabilities level of US$229m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.31x. Usually, for Chemicals 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.
Can ASIX service its debt comfortably?
With a debt-to-equity ratio of 50%, ASIX can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether ASIX 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 ASIX’s, case, the ratio of 13.52x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as ASIX’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although ASIX’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 ASIX’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 ASIX has company-specific issues impacting its capital structure decisions. You should continue to research AdvanSix to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for ASIX’s future growth? Take a look at our free research report of analyst consensus for ASIX’s outlook.
Valuation: What is ASIX 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 ASIX 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.
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.
