Investors are always looking for growth in small-cap stocks like American Vanguard Corporation (NYSE:AVD), with a market cap of US$436m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into AVD here.
Does AVD Produce Much Cash Relative To Its Debt?
AVD has built up its total debt levels in the last twelve months, from US$90m to US$160m – this includes long-term debt. With this increase in debt, AVD's cash and short-term investments stands at US$6.7m to keep the business going. Additionally, AVD has produced cash from operations of US$318k during the same period of time, resulting in an operating cash to total debt ratio of 0.2%, indicating that AVD’s debt is not covered by operating cash.
Can AVD pay its short-term liabilities?
At the current liabilities level of US$148m, it appears that the company has been able to meet these obligations given the level of current assets of US$341m, with a current ratio of 2.31x. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can AVD service its debt comfortably?
AVD is a relatively highly levered company with a debt-to-equity of 45%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether AVD 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 AVD's, case, the ratio of 8.04x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although AVD’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. Keep in mind I haven't considered other factors such as how AVD has been performing in the past. You should continue to research American Vanguard to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AVD’s future growth? Take a look at our free research report of analyst consensus for AVD’s outlook.
- Valuation: What is AVD 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 AVD 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.
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