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Investors are always looking for growth in small-cap stocks like Ameresco, Inc. (NYSE:AMRC), with a market cap of US$711m. 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. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into AMRC here.
AMRC’s Debt (And Cash Flows)
Over the past year, AMRC has ramped up its debt from US$491m to US$612m – this includes long-term debt. With this rise in debt, AMRC currently has US$25m remaining in cash and short-term investments , ready to be used for running the business. We note it produced negative cash flow 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 AMRC’s operating efficiency ratios such as ROA here.
Can AMRC meet its short-term obligations with the cash in hand?
With current liabilities at US$218m, the company has been able to meet these commitments with a current assets level of US$280m, leading to a 1.28x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Construction companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can AMRC service its debt comfortably?
With total debt exceeding equity, AMRC is considered a highly levered 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 AMRC’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 AMRC, the ratio of 3.85x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AMRC ample headroom to grow its debt facilities.
AMRC’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 AMRC's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure AMRC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ameresco to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMRC’s future growth? Take a look at our free research report of analyst consensus for AMRC’s outlook.
- Historical Performance: What has AMRC'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 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.