Does Atlantic Gold Corporation’s (TSXV:AGB) Debt Level Pose A Serious Problem?
While small-cap stocks, such as Atlantic Gold Corporation (TSXV:AGB) with its market cap of CAD CA$268.74M, 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. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for AGB
How does AGB’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. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. 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 AGB, operating cash flow turned out to be -0.04x its debt level over the past twelve months. This means what AGB 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 AGB’s operations at this point in time.
Can AGB pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? As cash flow from operation is hindered by adverse events, AGB may need to liquidate its short-term assets to meet these upcoming payments. We test for AGB’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that AGB does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Does AGB face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For AGB, the debt-to-equity ratio stands at above 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? AGB’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. In the future, its financial position may change. I recommend keeping on top of market expectations for AGB’s future growth on our free analysis platform.
Are you a potential investor? AGB’s high debt levels along with low cash coverage of debt in addition to low liquidity coverage of short-term expenses may not be what you’re after in an investment. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of AGB’s track record. You should continue your analysis by taking a look at AGB’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.
