Avalon Holdings Corporation (NYSEMKT:AWX) is a small-cap stock with a market capitalization of US$11m. 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. Why is it important? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into AWX here.
How does AWX’s operating cash flow stack up against its debt?
AWX’s debt level has been constant at around US$12m over the previous year including long-term debt. At this constant level of debt, AWX currently has US$1.8m remaining in cash and short-term investments , ready to deploy into the business. Additionally, AWX has generated US$3.1m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 26%, signalling that AWX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AWX’s case, it is able to generate 0.26x cash from its debt capital.
Can AWX meet its short-term obligations with the cash in hand?
With current liabilities at US$16m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.96x.
Does AWX face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 29%, AWX’s debt level may be seen as prudent. AWX is not taking on too much debt commitment, which may be constraining for future growth. We can test if AWX’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 AWX, the ratio of 1.08x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
AWX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how AWX has been performing in the past. I recommend you continue to research Avalon Holdings to get a better picture of the stock by looking at:
- Historical Performance: What has AWX’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 email@example.com.