How Financially Strong Is Australian Vintage Ltd (ASX:AVG)?
While small-cap stocks, such as Australian Vintage Ltd (ASX:AVG) with its market cap of AU$162.54m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into AVG here.
How much cash does AVG generate through its operations?
Over the past year, AVG has reduced its debt from AU$107.95m to AU$85.65m – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at AU$2.62m for investing into the business. Additionally, AVG has produced AU$14.00m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 16.34%, meaning that AVG’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AVG’s case, it is able to generate 0.16x cash from its debt capital.
Can AVG meet its short-term obligations with the cash in hand?
Looking at AVG’s most recent AU$52.70m liabilities, it appears that the company has been able to meet these commitments with a current assets level of AU$187.33m, leading to a 3.55x current account ratio. Though, anything about 3x may be excessive, since AVG may be leaving too much capital in low-earning investments.
Can AVG service its debt comfortably?
With a debt-to-equity ratio of 31.31%, AVG’s debt level may be seen as prudent. This range is considered safe as AVG is not taking on too much debt obligation, which may be constraining for future growth. We can test if AVG’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 AVG, the ratio of 2.48x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
AVG’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure AVG has company-specific issues impacting its capital structure decisions. You should continue to research Australian Vintage to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for AVG’s future growth? Take a look at our free research report of analyst consensus for AVG’s outlook.
Historical Performance: What has AVG’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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 pass 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.
