What You Must Know About A&W Revenue Royalties Income Fund’s (TSE:AW.UN) Financial Strength
While small-cap stocks, such as A&W Revenue Royalties Income Fund (TSX:AW.UN) with its market cap of CA$399.40M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into AW.UN here.
Does AW.UN generate enough cash through operations?
AW.UN has shrunken its total debt levels in the last twelve months, from CA$64.63M to CA$61.30M – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at CA$2.53M , ready to deploy into the business. Additionally, AW.UN has generated CA$27.05M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 44.13%, signalling that AW.UN’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AW.UN’s case, it is able to generate 0.44x cash from its debt capital.
Can AW.UN meet its short-term obligations with the cash in hand?
Looking at AW.UN’s most recent CA$2.33M liabilities, the company has been able to meet these commitments with a current assets level of CA$5.67M, leading to a 2.43x current account ratio. For Hospitality companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does AW.UN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 34.21%, AW.UN’s debt level may be seen as prudent. This range is considered safe as AW.UN is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
Next Steps:
AW.UN’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how AW.UN has been performing in the past. I suggest you continue to research A&W Revenue Royalties Income Fund to get a better picture of the stock by looking at:
1. Valuation: What is AW.UN 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 AW.UN is currently mispriced by the market.
2. Historical Performance: What has AW.UN’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.
3. 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 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.
