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Investors are always looking for growth in small-cap stocks like Advanced Emissions Solutions, Inc. (NASDAQ:ADES), with a market cap of US$228m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into ADES here.
ADES’s Debt (And Cash Flows)
ADES has increased its debt level by about US$74m over the last 12 months accounting for long term debt. With this ramp up in debt, the current cash and short-term investment levels stands at US$21m to keep the business going. On top of this, ADES has generated US$6.0m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 8.0%, indicating that ADES’s current level of operating cash is not high enough to cover debt.
Can ADES pay its short-term liabilities?
At the current liabilities level of US$40m, it seems that the business has been able to meet these obligations given the level of current assets of US$56m, with a current ratio of 1.41x. The current ratio is the number you get when you divide current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can ADES service its debt comfortably?
With debt reaching 64% of equity, ADES may be thought of as relatively highly levered. 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 check to see whether ADES is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ADES's, case, the ratio of 1.15x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ADES’s low interest coverage already puts the company at higher risk of default.
ADES’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 ADES's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ADES's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Advanced Emissions Solutions to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ADES’s future growth? Take a look at our free research report of analyst consensus for ADES’s outlook.
- Valuation: What is ADES 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 ADES 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 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.