Investors are always looking for growth in small-cap stocks like Ausdrill Limited (ASX:ASL), with a market cap of A$902.07M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ASL here.

How does ASL’s operating cash flow stack up against its debt?

ASL has sustained its debt level by about A$388.6M over the last 12 months – this includes both the current and long-term debt. At this constant level of debt, ASL currently has A$166.7M remaining in cash and short-term investments , ready to deploy into the business. On top of this, ASL has generated A$94.6M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 24.35%, signalling that ASL’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ASL’s case, it is able to generate 0.24x cash from its debt capital.

Can ASL pay its short-term liabilities?

With current liabilities at A$148.2M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.55x. Though, anything above 3x is considered high and could mean that ASL has too much idle capital in low-earning investments.

Does ASL face the risk of succumbing to its debt-load?

With debt reaching 61.67% of equity, ASL 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. 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 ASL’s case, the ratio of 1.8x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ASL’s low interest coverage already puts the company at higher risk of default.

Next Steps:

At its current level of cash flow coverage, ASL has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for ASL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Ausdrill to get a more holistic view of the stock by looking at: