ASX:AJM Historical Debt Oct 30th 17
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. AJM’s recent operating cash flow was -0.35 times its debt within the past year. This means what AJM can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at AJM’s operations at this point in time.
Can AJM pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, AJM may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that AJM does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Can AJM service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. In the case of AJM, the debt-to-equity ratio is 27.53%, which indicates that its debt is at an acceptable level. While debt-to-equity ratio has several factors at play, an easier way to check whether AJM’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. In AJM’s case, its interest is excessively covered by its earnings as the ratio sits at 16.2x. Debtors may be willing to loan the company more money, giving AJM ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? AJM’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may be different. You should always be researching market expectations for AJM’s future growth on our free analysis platform.
Are you a potential investor? AJM seems to have maintained a sensible level of debt, which means there’s still some headroom to grow debt funding. But its current cash flow coverage of existing debt, in addition to the low liquidity, is concerning. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of AJM’s track record. As a following step, you should take a look at AJM’s past performance analysis on our free platform to figure out AJM’s financial health position.
To help readers see pass 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.