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What does American Vanguard Corporation’s (NYSE:AVD) Balance Sheet Tell Us About Its Future?

Investors are always looking for growth in small-cap stocks like American Vanguard Corporation (NYSE:AVD), with a market cap of US$518m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into AVD here.

How does AVD’s operating cash flow stack up against its debt?

Over the past year, AVD has ramped up its debt from US$26m to US$74m , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$7m for investing into the business. On top of this, AVD has generated US$29m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 39%, meaning that AVD’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AVD’s case, it is able to generate 0.39x cash from its debt capital.

Does AVD’s liquid assets cover its short-term commitments?

With current liabilities at US$141m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.05x. Usually, for Chemicals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:AVD Historical Debt November 5th 18

Does AVD face the risk of succumbing to its debt-load?

AVD’s level of debt is appropriate relative to its total equity, at 23%. This range is considered safe as AVD is not taking on too much debt obligation, which may be constraining for future growth. We can test if AVD’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 AVD, the ratio of 10.15x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving AVD ample headroom to grow its debt facilities.

Next Steps:

AVD’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 AVD has company-specific issues impacting its capital structure decisions. I suggest you continue to research American Vanguard to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for AVD’s future growth? Take a look at our free research report of analyst consensus for AVD’s outlook.
  2. Valuation: What is AVD 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 AVD is currently mispriced by the market.
  3. 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.