Aeris Resources Limited (ASX:AIS) is a small-cap stock with a market capitalization of AU$15.41M. 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 AIS is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into AIS here.
Does AIS generate an acceptable amount of cash through operations?
AIS’s debt levels surged from AU$94.73M to AU$119.18M over the last 12 months , which is made up of current and long term debt. With this increase in debt, AIS currently has AU$14.91M remaining in cash and short-term investments for investing into the business. Moreover, AIS has generated cash from operations of AU$19.07M in the last twelve months, resulting in an operating cash to total debt ratio of 16.00%, indicating that AIS’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In AIS’s case, it is able to generate 0.16x cash from its debt capital.
Can AIS meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$36.45M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 1.x, which is below the prudent industry ratio of 3x.
ASX:AIS Historical Debt Feb 15th 18
Can AIS service its debt comfortably?
Since total debt levels have outpaced equities, AIS is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since AIS is presently loss-making, 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:
AIS’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for AIS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Aeris Resources to get a better picture of the stock by looking at:
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.