Is Appen Limited’s (ASX:APX) Balance Sheet Strong Enough To Weather A Storm?
Investors are always looking for growth in small-cap stocks like Appen Limited (ASX:APX), with a market cap of AU$1.4b. However, an important fact which most ignore is: how financially healthy is the business? IT companies, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into APX here.
How does APX’s operating cash flow stack up against its debt?
In the previous 12 months, APX’s rose by about AU$65m including long-term debt. With this ramp up in debt, APX’s cash and short-term investments stands at AU$24m for investing into the business. On top of this, APX has generated AU$19m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 29%, meaning that APX’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In APX’s case, it is able to generate 0.29x cash from its debt capital.
Can APX pay its short-term liabilities?
At the current liabilities level of AU$28m, the company has been able to meet these obligations given the level of current assets of AU$80m, with a current ratio of 2.88x. For IT 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.
Does APX face the risk of succumbing to its debt-load?
With debt reaching 61% of equity, APX may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether APX 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 APX’s, case, the ratio of 21.91x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as APX’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although APX’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. Since there is also no concerns around APX’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how APX has been performing in the past. I suggest you continue to research Appen to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for APX’s future growth? Take a look at our free research report of analyst consensus for APX’s outlook.
Valuation: What is APX 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 APX 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.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
