Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Investors are always looking for growth in small-cap stocks like Ark Restaurants Corp. (NASDAQ:ARKR), with a market cap of US$69m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to 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. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into ARKR here.
How does ARKR’s operating cash flow stack up against its debt?
ARKR’s debt level has been constant at around US$21m over the previous year which accounts for long term debt. At this constant level of debt, ARKR’s cash and short-term investments stands at US$3.2m for investing into the business. On top of this, ARKR has produced cash from operations of US$9.3m in the last twelve months, resulting in an operating cash to total debt ratio of 44%, meaning that ARKR’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ARKR’s case, it is able to generate 0.44x cash from its debt capital.
Can ARKR meet its short-term obligations with the cash in hand?
With current liabilities at US$15m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.72x.
Does ARKR face the risk of succumbing to its debt-load?
With debt reaching 49% of equity, ARKR may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if ARKR’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 ARKR, the ratio of 4.66x 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.
ARKR’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for ARKR’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Ark Restaurants to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARKR’s future growth? Take a look at our free research report of analyst consensus for ARKR’s outlook.
- Valuation: What is ARKR 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 ARKR 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.