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Investors are always looking for growth in small-cap stocks like A.P. Eagers Limited (ASX:APE), with a market cap of AU$1.9b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into APE here.
Does APE Produce Much Cash Relative To Its Debt?
APE has built up its total debt levels in the last twelve months, from AU$794m to AU$884m , which includes long-term debt. With this rise in debt, APE currently has AU$19m remaining in cash and short-term investments , ready to be used for running the business. On top of this, APE has generated cash from operations of AU$89m in the last twelve months, resulting in an operating cash to total debt ratio of 10%, signalling that APE’s current level of operating cash is not high enough to cover debt.
Can APE meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$774m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.13x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Specialty Retail companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is APE’s debt level acceptable?
With total debt exceeding equity, APE is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether APE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In APE's, case, the ratio of 5.72x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving APE ample headroom to grow its debt facilities.
APE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for APE's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research A.P. Eagers to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for APE’s future growth? Take a look at our free research report of analyst consensus for APE’s outlook.
- Valuation: What is APE 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 APE 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.