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Aeon Metals Limited (ASX:AML) is a small-cap stock with a market capitalization of AU$196m. 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? Since AML is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into AML here.
How much cash does AML generate through its operations?
AML’s debt levels have fallen from AU$32m to AU$15m over the last 12 months , which is made up of current and long term debt. With this debt repayment, AML’s cash and short-term investments stands at AU$13m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of AML’s operating efficiency ratios such as ROA here.
Can AML pay its short-term liabilities?
At the current liabilities level of AU$2m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$13m, with a current ratio of 6.09x. However, many consider anything above 3x to be quite high.
Does AML face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 24%, AML’s debt level may be seen as prudent. This range is considered safe as AML is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is very low for AML, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
AML’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure AML has company-specific issues impacting its capital structure decisions. I suggest you continue to research Aeon Metals to get a more holistic view of the stock by looking at: