Are Austal Limited’s (ASX:ASB) Interest Costs Too High?
While small-cap stocks, such as Austal Limited (ASX:ASB) with its market cap of AU$668m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into ASB here.
Does ASB produce enough cash relative to debt?
ASB has shrunken its total debt levels in the last twelve months, from AU$196m to AU$185m , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at AU$162m , ready to deploy into the business. Moreover, ASB has generated cash from operations of AU$66m in the last twelve months, resulting in an operating cash to total debt ratio of 35%, signalling that ASB’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ASB’s case, it is able to generate 0.35x cash from its debt capital.
Does ASB’s liquid assets cover its short-term commitments?
Looking at ASB’s AU$389m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.34x. Generally, for Aerospace & Defense companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is ASB’s debt level acceptable?
With debt at 34% of equity, ASB may be thought of as appropriately levered. ASB is not taking on too much debt commitment, which may be constraining for future growth. We can test if ASB’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For ASB, the ratio of 6.08x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
ASB’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure ASB has company-specific issues impacting its capital structure decisions. I recommend you continue to research Austal to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ASB’s future growth? Take a look at our free research report of analyst consensus for ASB’s outlook.
Valuation: What is ASB 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 ASB 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 editorial-team@simplywallst.com.
