While small-cap stocks, such as ADDvantage Technologies Group Inc (NASDAQ:AEY) with its market cap of $14.81M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the electronic industry, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into AEY here.
Does AEY generate enough cash through operations?
AEY’s debt levels have fallen from $5.2M to $4.4M over the last 12 months , which is made up of current and long term debt. With this debt payback, AEY currently has $4.5M remaining in cash and short-term investments for investing into the business. On top of this, AEY has produced $3.5M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 0.81x, signalling that AEY’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In AEY’s case, it is able to generate 0.81x cash from its debt capital.
Can AEY pay its short-term liabilities?
At the current liabilities level of $5.0M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $31.1M, leading to a 6.17x current account ratio. However, a ratio greater than 3x may be considered as too high, as AEY could be holding too much capital in a low-return investment environment.
Does AEY face the risk of succumbing to its debt-load?
AEY’s level of debt is appropriate relative to its total equity, at 16.28%. AEY is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with AEY, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? AEY’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. In the future, its financial position may be different. You should always be researching market expectations for AEY’s future growth on our free analysis platform.