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Are Ashland Global Holdings Inc.'s (NYSE:ASH) Interest Costs Too High?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Ashland Global Holdings Inc. (NYSE:ASH), with a market cap of US$4.8b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into ASH here.

ASH’s Debt (And Cash Flows)

ASH has sustained its debt level by about US$2.5b over the last 12 months which accounts for long term debt. At this constant level of debt, ASH's cash and short-term investments stands at US$164m to keep the business going. Additionally, ASH has generated cash from operations of US$286m during the same period of time, resulting in an operating cash to total debt ratio of 11%, signalling that ASH’s current level of operating cash is not high enough to cover debt.

Can ASH pay its short-term liabilities?

Looking at ASH’s US$920m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$2.1b, with a current ratio of 2.27x. The current ratio is the number you get when you divide current assets by current liabilities. For Chemicals 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.

NYSE:ASH Historical Debt, May 29th 2019

Can ASH service its debt comfortably?

With a debt-to-equity ratio of 75%, ASH can be considered as an above-average 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. We can check to see whether ASH is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ASH's, case, the ratio of 2.63x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ASH’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Although ASH’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. This is only a rough assessment of financial health, and I'm sure ASH has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ashland Global Holdings to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ASH’s future growth? Take a look at our free research report of analyst consensus for ASH’s outlook.
  2. Valuation: What is ASH 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 ASH 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.

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 editorial-team@simplywallst.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.