ARC Group Worldwide Inc (NASDAQ:ARCW) is a small-cap stock with a market capitalization of US$32m. 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? Given that ARCW is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into ARCW here.
Does ARCW produce enough cash relative to debt?
ARCW’s debt levels have fallen from US$47m to US$43m over the last 12 months , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$348k for investing into the business. On top of this, ARCW has generated cash from operations of US$111k during the same period of time, leading to an operating cash to total debt ratio of 0.3%, meaning that ARCW’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In ARCW’s case, it is able to generate 0.0026x cash from its debt capital.
Does ARCW’s liquid assets cover its short-term commitments?
Looking at ARCW’s US$19m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$31m, with a current ratio of 1.64x. For Machinery 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 ARCW service its debt comfortably?
Since total debt levels have outpaced equities, ARCW is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But 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.
Although ARCW’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. I admit this is a fairly basic analysis for ARCW’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research ARC Group Worldwide to get a more holistic view of the small-cap by looking at:
- 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 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.
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