Yahoo Finance Are ATCO Ltd.'s (TSE:ACO.X) Interest Costs Too High?
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ATCO Ltd. (TSE:ACO.X) is a small-cap stock with a market capitalization of CA$5.0b. 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? Assessing first and foremost the financial health is 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. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into ACO.X here.
Does ACO.X Produce Much Cash Relative To Its Debt?
ACO.X's debt levels surged from CA$10b to CA$11b over the last 12 months , which includes long-term debt. With this growth in debt, ACO.X's cash and short-term investments stands at CA$701m , ready to be used for running the business. On top of this, ACO.X has generated CA$1.1b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 9.6%, signalling that ACO.X’s current level of operating cash is not high enough to cover debt.
Can ACO.X pay its short-term liabilities?
With current liabilities at CA$1.8b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.14x. The current ratio is the number you get when you divide current assets by current liabilities. For Integrated Utilities 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 ACO.X’s debt level acceptable?
Since total debt levels exceed equity, ACO.X is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ACO.X's case, the ratio of 2.53x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
ACO.X’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 ACO.X's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research ATCO to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for ACO.X’s future growth? Take a look at our free research report of analyst consensus for ACO.X’s outlook.
Valuation: What is ACO.X 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 ACO.X 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.
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