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While small-cap stocks, such as Aumann AG (FRA:AAG) with its market cap of €532m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into AAG here.
How does AAG’s operating cash flow stack up against its debt?
AAG has sustained its debt level by about €24m over the last 12 months including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €83m , ready to deploy into the business. On top of this, AAG has generated €3.4m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 14%, signalling that AAG’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AAG’s case, it is able to generate 0.14x cash from its debt capital.
Does AAG’s liquid assets cover its short-term commitments?
With current liabilities at €75m, the company has been able to meet these commitments with a current assets level of €234m, leading to a 3.13x current account ratio. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can AAG service its debt comfortably?
With debt at 12% of equity, AAG may be thought of as appropriately levered. This range is considered safe as AAG is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether AAG 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 AAG’s, case, the ratio of 40.21x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving AAG ample headroom to grow its debt facilities.
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AAG’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, 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 AAG has been performing in the past. I recommend you continue to research Aumann to get a more holistic view of the stock by looking at: