Investors are always looking for growth in small-cap stocks like Ardmore Shipping Corporation (NYSE:ASC), with a market cap of US$263.57M. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into ASC here.
Does ASC generate enough cash through operations?
ASC’s debt level has been constant at around US$446.92M over the previous year – 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$39.46M , ready to deploy into the business. Moreover, ASC has produced cash from operations of US$18.42M in the last twelve months, resulting in an operating cash to total debt ratio of 4.12%, meaning that ASC’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In ASC’s case, it is able to generate 0.041x cash from its debt capital.
Does ASC’s liquid assets cover its short-term commitments?
At the current liabilities level of US$58.26M liabilities, the company has been able to meet these obligations given the level of current assets of US$83.88M, with a current ratio of 1.44x. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is ASC’s debt level acceptable?
Since total debt levels have outpaced equities, ASC 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. However, since ASC 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.
ASC’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for ASC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Ardmore Shipping to get a better picture of the stock by looking at:
- 1. 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.
- 2. 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.
- 3. 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.