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Investors are always looking for growth in small-cap stocks like Aegion Corporation (NASDAQ:AEGN), with a market cap of US$480m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into AEGN here.
AEGN’s Debt (And Cash Flows)
AEGN's debt levels surged from US$343m to US$390m over the last 12 months , which includes long-term debt. With this growth in debt, AEGN's cash and short-term investments stands at US$62m , ready to be used for running the business. On top of this, AEGN has generated cash from operations of US$32m in the last twelve months, resulting in an operating cash to total debt ratio of 8.2%, indicating that AEGN’s debt is not covered by operating cash.
Does AEGN’s liquid assets cover its short-term commitments?
Looking at AEGN’s US$218m in current liabilities, the company has been able to meet these commitments with a current assets level of US$456m, leading to a 2.09x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Construction 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.
Does AEGN face the risk of succumbing to its debt-load?
AEGN is a relatively highly levered company with a debt-to-equity of 86%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if AEGN’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 AEGN, the ratio of 3.75x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
AEGN’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure AEGN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Aegion to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for AEGN’s future growth? Take a look at our free research report of analyst consensus for AEGN’s outlook.
Valuation: What is AEGN 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 AEGN 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.