Does Amarillo Gold Corporation’s (TSXV:AGC) Debt Level Pose A Serious Problem?
Investors are always looking for growth in small-cap stocks like Amarillo Gold Corporation (TSXV:AGC), with a market cap of CAD CA$23.76M. However, an important fact which most ignore is: how financially healthy is the company? There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Amarillo Gold
Does AGC generate enough cash through operations?
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. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can AGC pay off what it owes to its debtholder by using only cash from its operational activities? In the case of AGC, operating cash flow turned out to be -0.18x its debt level over the past twelve months. This means what AGC can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at AGC’s operations at this point in time.
Can AGC meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, AGC could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that AGC does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is AGC’s level of debt at an acceptable level?
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. For AGC, the debt-to-equity ratio is 46.57%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet.
Next Steps:
Are you a shareholder? AGC’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that AGC’s financial situation may change. I suggest keeping abreast of market expectations for AGC’s future growth on our free analysis platform.
Are you a potential investor? AGC’s large debt ratio along with poor cash coverage in addition to low liquidity coverage of short-term expenses may send potential investors running the other way. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of AGC’s track record. You should continue your analysis by taking a look at AGC’s past performance analysis on our free platform to conclude on AGC’s financial health.
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.
