Arcus ASA (OB:ARCUS) is a small-cap stock with a market capitalization of ØRE2.92B. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ARCUS here.
Does ARCUS generate an acceptable amount of cash through operations?
Over the past year, ARCUS has ramped up its debt from ØRE902.75M to ØRE999.29M – this includes both the current and long-term debt. With this growth in debt, ARCUS currently has ØRE184.42M remaining in cash and short-term investments for investing into the business. Additionally, ARCUS has generated cash from operations of ØRE199.90M during the same period of time, resulting in an operating cash to total debt ratio of 20.00%, meaning that ARCUS’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ARCUS’s case, it is able to generate 0.2x cash from its debt capital.
Can ARCUS pay its short-term liabilities?
At the current liabilities level of ØRE1.82B liabilities, it seems that the business has been able to meet these obligations given the level of current assets of ØRE2.11B, with a current ratio of 1.16x. Generally, for Beverage companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is ARCUS’s debt level acceptable?
With debt reaching 59.86% of equity, ARCUS may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In ARCUS’s case, the ratio of 11.55x 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.