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Investors are always looking for growth in small-cap stocks like AVJennings Limited (ASX:AVJ), with a market cap of AU$244m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into AVJ here.
AVJ’s Debt (And Cash Flows)
AVJ's debt level has been constant at around AU$200m over the previous year – this includes long-term debt. At this current level of debt, AVJ's cash and short-term investments stands at AU$2.7m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of AVJ’s operating efficiency ratios such as ROA here.
Does AVJ’s liquid assets cover its short-term commitments?
With current liabilities at AU$108m, the company has been able to meet these obligations given the level of current assets of AU$283m, with a current ratio of 2.61x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Real Estate companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does AVJ face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 52%, AVJ can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if AVJ’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 AVJ, the ratio of 47.02x 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.
Although AVJ’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how AVJ has been performing in the past. I recommend you continue to research AVJennings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AVJ’s future growth? Take a look at our free research report of analyst consensus for AVJ’s outlook.
- Historical Performance: What has AVJ'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.
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 firstname.lastname@example.org. 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.