AJ Lucas Group Limited (ASX:AJL) is a small-cap stock with a market capitalization of A$242.85M. 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? Since AJL is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into AJL here.
Does AJL generate an acceptable amount of cash through operations?
AJL’s debt level has been constant at around A$107.3M over the previous year comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at A$10.3M , ready to deploy into the business. Though its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of AJL’s operating efficiency ratios such as ROA here.
Can AJL pay its short-term liabilities?
Looking at AJL’s most recent A$35.5M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of A$76.6M, with a current ratio of 2.16x. For construction 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 AJL’s level of debt at an acceptable level?
AJL is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since AJL is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, AJL has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may be different. I suggest keeping abreast of market expectations for AJL’s future growth on our free analysis platform.