While small-cap stocks, such as ARC Group Worldwide Inc (NASDAQ:ARCW) with its market cap of US$52.44M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since ARCW is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into ARCW here.
How does ARCW’s operating cash flow stack up against its debt?
Over the past year, ARCW has reduced its debt from US$55.18M to US$47.88M , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$593.00K for investing into the business. On top of this, ARCW has produced US$2.85M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 5.95%, indicating that ARCW’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In ARCW’s case, it is able to generate 0.06x cash from its debt capital.
Does ARCW’s liquid assets cover its short-term commitments?
At the current liabilities level of US$17.79M liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$30.05M, leading to a 1.69x current account ratio. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is ARCW’s debt level acceptable?
ARCW is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since ARCW is currently unprofitable, 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.
ARCW’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how ARCW has been performing in the past. You should continue to research ARC Group Worldwide to get a more holistic view of the stock by looking at:
- Valuation: What is ARCW 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 ARCW is currently mispriced by the market.
- Historical Performance: What has ARCW’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.
To help readers see pass 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.