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Augusta Industries Inc (TSXV:AAO): Time For A Financial Health Check

Frank Brewer

Augusta Industries Inc (TSXV:AAO) is a small-cap stock with a market capitalization of CAD CA$8.96M. 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. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for Augusta Industries

How does AAO’s operating cash flow stack up against its debt?

TSXV:AAO Historical Debt Nov 2nd 17

While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These catastrophes does not mean the company can stop servicing its debt obligations. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. Last year, AAO’s operating cash flow was 0.31x its current debt. A ratio of over a 0.25x is a positive sign and shows that AAO is generating ample cash from its core business, which should increase its potential to pay back near-term debt.

Does AAO’s liquid assets cover its short-term commitments?

In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. During times of unfavourable events, AAO could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for AAO’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that AAO does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

Can AAO service its debt comfortably?

While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. AAO’s debt-to-equity ratio exceeds 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate.

Next Steps:

Are you a shareholder? AAO’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may be different. I suggest researching market expectations for AAO’s future growth on our free analysis platform.

Are you a potential investor? AAO’s high debt level shouldn’t scare off investors just yet. Its operating cash flow seems adequate to meet obligations which means its debt is being put to good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. To gain more conviction in the stock, you need to further examine the company’s track record. As a following step, you should take a look at AAO’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.


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.