Investors are always looking for growth in small-cap stocks like ARC Group Worldwide Inc (NASDAQ:ARCW), with a market cap of US$36.61M. However, an important fact which most ignore is: how financially healthy is the business? Given that ARCW is not presently profitable, it’s crucial 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, this commentary is still very high-level, so I recommend you dig deeper yourself into ARCW here.
Does ARCW generate an acceptable amount of cash through operations?
ARCW’s debt levels have fallen from US$55.18M to US$47.88M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, ARCW’s cash and short-term investments stands at US$593.00K for investing into the business. Additionally, ARCW has produced cash from operations of US$2.85M over the same time period, resulting in an operating cash to total debt ratio of 5.95%, signalling that ARCW’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses 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?
Looking at ARCW’s most recent 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. Generally, for Machinery companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ARCW face the risk of succumbing to its debt-load?
ARCW is a highly-leveraged company with debt exceeding equity by over 100%. 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 presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
At its current level of cash flow coverage, ARCW has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for ARCW’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research ARC Group Worldwide to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.
- 1. 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 this free research report helps visualize whether ARCW is currently mispriced by the market.
- 2. 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 ARCW’s historicals for more clarity.
- 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore a 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.