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While small-cap stocks, such as American Shared Hospital Services (NYSEMKT:AMS) with its market cap of US$22m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Healthcare companies, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into AMS here.
How does AMS’s operating cash flow stack up against its debt?
AMS has shrunken its total debt levels in the last twelve months, from US$24m to US$21m – this includes both the current and long-term debt. With this reduction in debt, AMS currently has US$3m remaining in cash and short-term investments , ready to deploy into the business. On top of this, AMS has generated cash from operations of US$9m during the same period of time, leading to an operating cash to total debt ratio of 44%, meaning that AMS’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AMS’s case, it is able to generate 0.44x cash from its debt capital.
Can AMS pay its short-term liabilities?
With current liabilities at US$9m, it seems that the business has been able to meet these commitments with a current assets level of US$10m, leading to a 1.11x current account ratio. Usually, for Healthcare companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is AMS’s debt level acceptable?
With a debt-to-equity ratio of 69%, AMS can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In AMS’s case, the ratio of 2.32x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as AMS’s low interest coverage already puts the company at higher risk of default.
Although AMS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for AMS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research American Shared Hospital Services to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for AMS’s future growth? Take a look at our free research report of analyst consensus for AMS’s outlook.
Valuation: What is AMS 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 AMS 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 email@example.com.