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While small-cap stocks, such as Ardmore Shipping Corporation (NYSE:ASC) with its market cap of US$219m, 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 ASC is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into ASC here.
Does ASC Produce Much Cash Relative To Its Debt?
Over the past year, ASC has maintained its debt levels at around US$449m which accounts for long term debt. At this constant level of debt, ASC's cash and short-term investments stands at US$52m to keep the business going. Additionally, ASC has produced cash from operations of US$6.0m during the same period of time, leading to an operating cash to total debt ratio of 1.3%, indicating that ASC’s debt is not covered by operating cash.
Can ASC pay its short-term liabilities?
At the current liabilities level of US$62m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.56x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can ASC service its debt comfortably?
Since total debt levels exceed equity, ASC is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since ASC is currently loss-making, 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 ASC’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. 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 more holistic view of the small-cap 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.