While small-cap stocks, such as Alico, Inc. (NASDAQ:ALCO) with its market cap of US$222m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into ALCO here.
How does ALCO’s operating cash flow stack up against its debt?
ALCO’s debt levels have fallen from US$185m to US$175m over the last 12 months , which includes long-term debt. With this reduction in debt, ALCO currently has US$25m remaining in cash and short-term investments , ready to deploy into the business. Additionally, ALCO has generated US$19m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 11%, signalling that ALCO’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ALCO’s case, it is able to generate 0.11x cash from its debt capital.
Can ALCO pay its short-term liabilities?
At the current liabilities level of US$21m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.36x. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can ALCO service its debt comfortably?
With a debt-to-equity ratio of 99%, ALCO can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if ALCO’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 ALCO, the ratio of 1.5x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
ALCO’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. I admit this is a fairly basic analysis for ALCO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Alico to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALCO’s future growth? Take a look at our free research report of analyst consensus for ALCO’s outlook.
- Valuation: What is ALCO 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 ALCO 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.
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 firstname.lastname@example.org.