Does Astorius Resources Ltd’s (TSXV:ASQ) Debt Level Pose A Serious Problem?
While small-cap stocks, such as Astorius Resources Ltd (TSXV:ASQ) with its market cap of CAD CA$5.22M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. 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. See our latest analysis for ASQ
How does ASQ’s operating cash flow stack up against its debt?
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. These catastrophes does not mean the company can stop servicing its debt obligations. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of ASQ, operating cash flow turned out to be -9.41x its debt level over the past twelve months. This means what ASQ 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 ASQ’s operations at this point in time.
Does ASQ’s liquid assets cover its short-term commitments?
What about its other commitments such as payments to suppliers and salaries to its employees? In times of adverse events, ASQ may need to liquidate its short-term assets to pay these immediate obligations. We test for ASQ’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that ASQ is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Does ASQ face the risk of succumbing to its debt-load?
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 ASQ, the debt-to-equity ratio is 58.51%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level.
Next Steps:
Are you a shareholder? ASQ’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. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may be different. I suggest keeping on top of market expectations for ASQ’s future growth on our free analysis platform.
Are you a potential investor? ASQ’s high debt levels on top of poor cash coverage in addition to low liquidity coverage of near-term commitments may send potential investors running the other way. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of ASQ’s track record. You should continue your analysis by taking a look at ASQ’s past performance analysis on our free platform to conclude on ASQ’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.
