Yahoo Finance What does The Alumasc Group plc’s (LON:ALU) Balance Sheet Tell Us About Its Future?
The Alumasc Group plc (LON:ALU) is a small-cap stock with a market capitalization of UK£46m. 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? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ALU here.
How much cash does ALU generate through its operations?
ALU has built up its total debt levels in the last twelve months, from UK£3m to UK£9m – this includes both the current and long-term debt. With this rise in debt, ALU’s cash and short-term investments stands at UK£5m for investing into the business. Moreover, ALU has generated cash from operations of UK£2m over the same time period, resulting in an operating cash to total debt ratio of 18%, indicating that ALU’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ALU’s case, it is able to generate 0.18x cash from its debt capital.
Does ALU’s liquid assets cover its short-term commitments?
With current liabilities at UK£23m, it appears that the company has been able to meet these commitments with a current assets level of UK£39m, leading to a 1.67x current account ratio. Generally, for Building companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is ALU’s debt level acceptable?
With a debt-to-equity ratio of 39%, ALU’s debt level may be seen as prudent. This range is considered safe as ALU is not taking on too much debt obligation, which may be constraining for future growth. We can test if ALU’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 ALU, the ratio of 26.35x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ALU ample headroom to grow its debt facilities.
Next Steps:
ALU’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, 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 ALU has company-specific issues impacting its capital structure decisions. I recommend you continue to research Alumasc Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ALU’s future growth? Take a look at our free research report of analyst consensus for ALU’s outlook.
Valuation: What is ALU 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 ALU 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.
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.
