Ascential plc (LON:ASCL) is a small-cap stock with a market capitalization of UK£1.4b. 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? 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into ASCL here.
How much cash does ASCL generate through its operations?
ASCL’s debt levels surged from UK£286m to UK£332m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, ASCL currently has UK£47m remaining in cash and short-term investments for investing into the business. On top of this, ASCL has produced UK£79m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 24%, meaning that ASCL’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ASCL’s case, it is able to generate 0.24x cash from its debt capital.
Does ASCL’s liquid assets cover its short-term commitments?
Looking at ASCL’s most recent UK£231m liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of UK£223m, leading to a current ratio of 0.97x.
Does ASCL face the risk of succumbing to its debt-load?
With debt reaching 92% of equity, ASCL 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. We can check to see whether ASCL 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 ASCL’s, case, the ratio of 10.07x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ASCL ample headroom to grow its debt facilities.
Next Steps:
ASCL’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for ASCL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Ascential to get a better picture of the stock by looking at: