Investors are always looking for growth in small-cap stocks like Ampco-Pittsburgh Corporation (NYSE:AP), with a market cap of US$40m. However, an important fact which most ignore is: how financially healthy is the business? Since AP is loss-making right now, it’s vital to understand 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. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into AP here.
AP’s Debt (And Cash Flows)
AP has built up its total debt levels in the last twelve months, from US$66m to US$78m , which accounts for long term debt. With this growth in debt, AP currently has US$20m remaining in cash and short-term investments to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can take a look at some of AP’s operating efficiency ratios such as ROA here.
Can AP pay its short-term liabilities?
With current liabilities at US$167m, it seems that the business has been able to meet these obligations given the level of current assets of US$228m, with a current ratio of 1.36x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Metals and Mining companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is AP’s debt level acceptable?
AP is a relatively highly levered company with a debt-to-equity of 83%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since AP is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although AP’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 AP has company-specific issues impacting its capital structure decisions. You should continue to research Ampco-Pittsburgh to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has AP's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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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