Ardmore Shipping Corporation (NYSE:ASC) is a small-cap stock with a market capitalization of US$221m. 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? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into ASC here.
How much cash does ASC generate through its operations?
Over the past year, ASC has maintained its debt levels at around US$457m – this includes both the current and long-term debt. At this current level of debt, ASC’s cash and short-term investments stands at US$48m for investing into the business. On top of this, ASC has produced US$19m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 4.1%, meaning that ASC’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In ASC’s case, it is able to generate 0.041x cash from its debt capital.
Can ASC pay its short-term liabilities?
With current liabilities at US$65m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.42x. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ASC service its debt comfortably?
ASC 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. Though, since ASC is presently 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.
ASC’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 an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how ASC has been performing in the past. I recommend you continue to research Ardmore Shipping to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ASC’s future growth? Take a look at our free research report of analyst consensus for ASC’s outlook.
- Valuation: What is ASC 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 ASC 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 email@example.com.