Is Alaska Communications Systems Group Inc (ALSK) A Financially Sound Company?
While small-cap stocks, such as Alaska Communications Systems Group Inc (NASDAQ:ALSK) with its market cap of USD $126.89M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. View our latest analysis for Alaska Communications Systems Group
Does ALSK generate an acceptable amount of cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of ALSK, operating cash flow turned out to be 0.19x its debt level over the past twelve months. This means, over a tenth of ALSK’s near term debt can be covered by its day-to-day cash income, which somewhat reduces its riskiness to its debtholders.
Can ALSK meet its short-term obligations with the cash in hand?
What about its other commitments such as payments to suppliers and salaries to its employees? During times of unfavourable events, ALSK could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that ALSK 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.
Does ALSK face the risk of succumbing to its debt-load?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For ALSK, the debt-to-equity ratio stands at above 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. In ALSK’s case, its interest is not sufficiently covered by its profits as the ratio is 1.37x. This means lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, ALSK has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that ALSK’s financial situation may change. I recommend keeping abreast of market expectations for ALSK’s future growth on our free analysis platform.
Are you a potential investor? ALSK’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. You should continue your analysis by taking a look at ALSK’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.
