Investors are always looking for growth in small-cap stocks like Atrum Coal Limited (ASX:ATU), with a market cap of AUD A$41.76M. However, an important fact which most ignore is: how financially healthy is the company? There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Atrum Coal
How does ATU’s operating cash flow stack up against its debt?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can ATU pay off what it owes to its debtholder by using only cash from its operational activities? In the case of ATU, operating cash flow turned out to be -2.48x its debt level over the past twelve months. This means what ATU can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at ATU’s operations at this point in time.
Can ATU pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, ATU could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for ATU’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that ATU is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Is ATU’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. In the case of ATU, the debt-to-equity ratio is 54.34%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet.
Next Steps:
Are you a shareholder? ATU’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may be different. I recommend researching market expectations for ATU’s future growth on our free analysis platform.