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Alaska Communications Systems Group, Inc. (NASDAQ:ALSK) is a small-cap stock with a market capitalization of US$95m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Telecom industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ALSK here.
Does ALSK produce enough cash relative to debt?
Over the past year, ALSK has reduced its debt from US$188m to US$172m , which includes long-term debt. With this reduction in debt, ALSK currently has US$17m remaining in cash and short-term investments for investing into the business. On top of this, ALSK has produced cash from operations of US$52m during the same period of time, leading to an operating cash to total debt ratio of 30%, signalling that ALSK’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ALSK’s case, it is able to generate 0.3x cash from its debt capital.
Can ALSK pay its short-term liabilities?
At the current liabilities level of US$50m, it seems that the business has been able to meet these commitments with a current assets level of US$61m, leading to a 1.24x current account ratio. Usually, for Telecom companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ALSK service its debt comfortably?
ALSK is a highly-leveraged company with debt exceeding equity by over 100%. 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 ALSK’s case, the ratio of 1.78x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ALSK’s low interest coverage already puts the company at higher risk of default.
Although ALSK’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. This is only a rough assessment of financial health, and I’m sure ALSK has company-specific issues impacting its capital structure decisions. I recommend you continue to research Alaska Communications Systems Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALSK’s future growth? Take a look at our free research report of analyst consensus for ALSK’s outlook.
- Valuation: What is ALSK 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 ALSK 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.