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Investors are always looking for growth in small-cap stocks like ArcBest Corporation (NASDAQ:ARCB), with a market cap of US$639m. 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, as mismanagement of capital can lead to 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. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into ARCB here.
Does ARCB Produce Much Cash Relative To Its Debt?
ARCB's debt levels surged from US$252m to US$349m over the last 12 months , which includes long-term debt. With this rise in debt, ARCB's cash and short-term investments stands at US$255m to keep the business going. Moreover, ARCB has produced cash from operations of US$220m over the same time period, leading to an operating cash to total debt ratio of 63%, indicating that ARCB’s debt is appropriately covered by operating cash.
Can ARCB meet its short-term obligations with the cash in hand?
With current liabilities at US$432m, it appears that the company has been able to meet these obligations given the level of current assets of US$607m, with a current ratio of 1.4x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Transportation companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ARCB face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 48%, ARCB can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ARCB's case, the ratio of 22.36x suggests that interest is comfortably 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.
ARCB’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. Since there is also no concerns around ARCB's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure ARCB has company-specific issues impacting its capital structure decisions. I suggest you continue to research ArcBest to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARCB’s future growth? Take a look at our free research report of analyst consensus for ARCB’s outlook.
- Valuation: What is ARCB 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 ARCB 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 email@example.com. 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.