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While small-cap stocks, such as Avenira Limited (ASX:AEV) with its market cap of AU$17m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that AEV is not presently profitable, 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. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into AEV here.
How does AEV’s operating cash flow stack up against its debt?
AEV has shrunken its total debt levels in the last twelve months, from AU$8.5m to AU$8.0m – this includes long-term debt. With this debt repayment, AEV currently has AU$3.7m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of AEV’s operating efficiency ratios such as ROA here.
Can AEV meet its short-term obligations with the cash in hand?
Looking at AEV’s AU$3.0m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$6.9m, leading to a 2.33x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is AEV’s debt level acceptable?
With debt at 14% of equity, AEV may be thought of as appropriately levered. AEV is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for AEV, and the company also has the ability and headroom to increase debt if needed going forward.
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AEV has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, 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 AEV has company-specific issues impacting its capital structure decisions. You should continue to research Avenira to get a better picture of the stock by looking at:
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Historical Performance: What has AEV’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.