Yahoo Finance Is AJ Lucas Group Limited’s (ASX:AJL) Balance Sheet A Threat To Its Future?
Investors are always looking for growth in small-cap stocks like AJ Lucas Group Limited (ASX:AJL), with a market cap of AU$158m. However, an important fact which most ignore is: how financially healthy is the business? Given that AJL is not presently profitable, it’s vital to evaluate 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 recommend you dig deeper yourself into AJL here.
How much cash does AJL generate through its operations?
Over the past year, AJL has reduced its debt from AU$107m to AU$85m , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at AU$9.4m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. 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 AU$59m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$83m, with a current ratio of 1.4x. Generally, for Construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does AJL face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 61%, AJL can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since AJL is presently loss-making, there’s a question of sustainability of its current operations. 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:
Although AJL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around AJL’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how AJL has been performing in the past. You should continue to research AJ Lucas Group to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for AJL’s future growth? Take a look at our free research report of analyst consensus for AJL’s outlook.
Historical Performance: What has AJL’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
