Is Avesoro Resources Inc (TSE:ASO) A Financially Sound Company?
While small-cap stocks, such as Avesoro Resources Inc (TSE:ASO) with its market cap of CA$251m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that ASO is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ASO here.
How much cash does ASO generate through its operations?
ASO’s debt levels surged from US$120m to US$134m over the last 12 months , which is made up of current and long term debt. With this growth in debt, ASO’s cash and short-term investments stands at US$13m for investing into the business. On top of this, ASO has produced cash from operations of US$66m in the last twelve months, leading to an operating cash to total debt ratio of 49%, indicating that ASO’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In ASO’s case, it is able to generate 0.49x cash from its debt capital.
Can ASO meet its short-term obligations with the cash in hand?
With current liabilities at US$89m, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$87m, leading to a current ratio of 0.98x.
Can ASO service its debt comfortably?
ASO is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since ASO is presently loss-making, 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.
Next Steps:
ASO’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how ASO has been performing in the past. You should continue to research Avesoro Resources to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ASO’s future growth? Take a look at our free research report of analyst consensus for ASO’s outlook.
Valuation: What is ASO 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 ASO 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.
