Yahoo Finance Is Aggreko Plc's (LON:AGK) Balance Sheet A Threat To Its Future?
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Investors are always looking for growth in small-cap stocks like Aggreko Plc (LON:AGK), with a market cap of UK£2.0b. However, an important fact which most ignore is: how financially healthy is the business? 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. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into AGK here.
AGK’s Debt (And Cash Flows)
AGK's debt levels surged from UK£725m to UK£771m over the last 12 months , which accounts for long term debt. With this increase in debt, AGK's cash and short-term investments stands at UK£100m , ready to be used for running the business. Additionally, AGK has produced UK£330m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 43%, signalling that AGK’s debt is appropriately covered by operating cash.
Does AGK’s liquid assets cover its short-term commitments?
With current liabilities at UK£571m, it appears that the company has been able to meet these commitments with a current assets level of UK£1.1b, leading to a 1.99x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does AGK face the risk of succumbing to its debt-load?
AGK is a relatively highly levered company with a debt-to-equity of 56%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if AGK’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AGK, the ratio of 5.88x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
AGK’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how AGK has been performing in the past. I recommend you continue to research Aggreko to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for AGK’s future growth? Take a look at our free research report of analyst consensus for AGK’s outlook.
Valuation: What is AGK worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AGK is currently mispriced by the market.
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.
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