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American Shared Hospital Services (NYSEMKT:AMS) is a small-cap stock with a market capitalization of US$17m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into AMS here.
Does AMS Produce Much Cash Relative To Its Debt?
AMS's debt levels have fallen from US$22m to US$20m over the last 12 months , which includes long-term debt. With this debt repayment, AMS currently has US$2.0m remaining in cash and short-term investments , ready to be used for running the business. Additionally, AMS has generated US$7.7m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 39%, meaning that AMS’s debt is appropriately covered by operating cash.
Can AMS meet its short-term obligations with the cash in hand?
At the current liabilities level of US$8.8m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.1x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Healthcare companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is AMS’s debt level acceptable?
With debt reaching 59% of equity, AMS may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AMS's case, the ratio of 2.02x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although AMS’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure AMS has company-specific issues impacting its capital structure decisions. You should continue to research American Shared Hospital Services to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMS’s future growth? Take a look at our free research report of analyst consensus for AMS’s outlook.
- Valuation: What is AMS 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 AMS 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.
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 firstname.lastname@example.org. 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.