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Is ALJ Regional Holdings, Inc.'s (NASDAQ:ALJJ) Balance Sheet A Threat To Its Future?

Simply Wall St

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While small-cap stocks, such as ALJ Regional Holdings, Inc. (NASDAQ:ALJJ) with its market cap of US$63m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that ALJJ is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into ALJJ here.

ALJJ’s Debt (And Cash Flows)

ALJJ has sustained its debt level by about US$103m 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$7.5m to keep the business going. On top of this, ALJJ has produced cash from operations of US$24m during the same period of time, resulting in an operating cash to total debt ratio of 23%, indicating that ALJJ’s current level of operating cash is high enough to cover debt.

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

Looking at ALJJ’s US$42m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$59m, with a current ratio of 1.4x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NasdaqGM:ALJJ Historical Debt, July 17th 2019

Can ALJJ service its debt comfortably?

Since total debt levels exceed equity, ALJJ is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since ALJJ is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

ALJJ’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 ALJJ'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 ALJJ has company-specific issues impacting its capital structure decisions. I suggest you continue to research ALJ Regional Holdings to get a better picture of the small-cap by looking at:

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