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Ahlers AG (FRA:AAH) is a small-cap stock with a market capitalization of €28.9m. 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, as mismanagement of capital can lead to 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. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into AAH here.
How does AAH’s operating cash flow stack up against its debt?
AAH’s debt level has been constant at around €42.7m over the previous year made up of current and long term debt. At this current level of debt, the current cash and short-term investment levels stands at €7.5m for investing into the business. Additionally, AAH has generated €10.4m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 24.4%, indicating that AAH’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AAH’s case, it is able to generate 0.24x cash from its debt capital.
Does AAH’s liquid assets cover its short-term commitments?
Looking at AAH’s most recent €50.4m liabilities, it seems that the business has been able to meet these commitments with a current assets level of €117.2m, leading to a 2.33x current account ratio. For Luxury companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can AAH service its debt comfortably?
AAH is a relatively highly levered company with a debt-to-equity of 42.1%. 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 AAH’s case, the ratio of 0.86x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
AAH’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. However, 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 AAH has been performing in the past. I recommend you continue to research Ahlers to get a more holistic view of the stock by looking at: