Aramus SA (WSE:ARA) is a small-cap stock with a market capitalization of zł7.1m. 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? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into ARA here.
How does ARA’s operating cash flow stack up against its debt?
ARA’s debt levels have fallen from zł25.8m to zł6.6m over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, ARA currently has zł1.1m remaining in cash and short-term investments , ready to deploy into the business. On top of this, ARA has generated zł20.6m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 311%, indicating that ARA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ARA’s case, it is able to generate 3.11x cash from its debt capital.
Does ARA’s liquid assets cover its short-term commitments?
At the current liabilities level of zł6.1m liabilities, it seems that the business has not been able to meet these commitments with a current assets level of zł4.0m, leading to a 0.67x current account ratio. which is under the appropriate industry ratio of 3x.
Can ARA service its debt comfortably?
With debt reaching 57.7% of equity, ARA may be thought of as relatively highly levered. 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 ARA’s case, the ratio of 8.51x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ARA’s high interest coverage is seen as responsible and safe practice.
Although ARA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how ARA has been performing in the past. I suggest you continue to research Aramus to get a more holistic view of the stock by looking at:
- Valuation: What is ARA 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 ARA is currently mispriced by the market.
- Historical Performance: What has ARA’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 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 email@example.com.