Alexium International Group Limited (ASX:AJX) is a small-cap stock with a market capitalization of AUD A$128.70M. 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? Given that AJX is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into AJX here.
How does AJX’s operating cash flow stack up against its debt?
AJX’s debt levels surged from A$0M to A$6M over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at A$3M for investing into the business. However, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of AJX’s operating efficiency ratios such as ROA here.
Does AJX’s liquid assets cover its short-term commitments?
At the current liabilities level of A$8M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of A$7M, with a current ratio of 0.88x below the prudent level of 3x.
Does AJX face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, AJX is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since AJX is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Are you a shareholder? With a high level of debt on its balance sheet, AJX could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for AJX to increase its operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may change. You should always be researching market expectations for AJX’s future growth on our free analysis platform.
Are you a potential investor? AJX’s large debt ratio along with poor cash coverage in addition to low liquidity coverage of near-term obligations may not be what you’re after in an investment. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of AJX’s track record. As a following step, you should take a look at AJX’s past performance analysis on our free platform to conclude on AJX’s financial health.
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.