Yahoo Finance Ascential plc (LON:ASCL): Time For A Financial Health Check
Ascential plc (LON:ASCL) is a small-cap stock with a market capitalization of UK£1.4b. 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? Understanding the company's financial health becomes essential, since poor capital management may bring about 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, potential investors would need to take a closer look, and I recommend you dig deeper yourself into ASCL here.
ASCL’s Debt (And Cash Flows)
Over the past year, ASCL has reduced its debt from UK£317m to UK£292m , which also accounts for long term debt. With this debt payback, ASCL currently has UK£182m remaining in cash and short-term investments to keep the business going. Additionally, ASCL has produced UK£65m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 22%, indicating that ASCL’s debt is appropriately covered by operating cash.
Can ASCL meet its short-term obligations with the cash in hand?
Looking at ASCL’s UK£213m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of UK£300m, leading to a 1.41x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Media 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.
Is ASCL’s debt level acceptable?
With a debt-to-equity ratio of 53%, ASCL can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ASCL's case, the ratio of 7.04x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as ASCL’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although ASCL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ASCL's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure ASCL has company-specific issues impacting its capital structure decisions. You should continue to research Ascential to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for ASCL’s future growth? Take a look at our free research report of analyst consensus for ASCL’s outlook.
Valuation: What is ASCL 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 ASCL 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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