While small-cap stocks, such as Acushnet Holdings Corp. (NYSE:GOLF) with its market cap of US$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into GOLF here.
How does GOLF’s operating cash flow stack up against its debt?
Over the past year, GOLF has reduced its debt from US$464m to US$406m , which includes long-term debt. With this debt repayment, GOLF’s cash and short-term investments stands at US$56m for investing into the business. Additionally, GOLF has produced cash from operations of US$121m over the same time period, resulting in an operating cash to total debt ratio of 30%, signalling that GOLF’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GOLF’s case, it is able to generate 0.3x cash from its debt capital.
Can GOLF meet its short-term obligations with the cash in hand?
With current liabilities at US$327m, the company has been able to meet these commitments with a current assets level of US$710m, leading to a 2.17x current account ratio. For Leisure companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
NYSE:GOLF Historical Debt January 22nd 19
Does GOLF face the risk of succumbing to its debt-load?
GOLF is a relatively highly levered company with a debt-to-equity of 44%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether GOLF 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 GOLF’s, case, the ratio of 9.98x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as GOLF’s high interest coverage is seen as responsible and safe practice.
Next Steps:
GOLF’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. Since there is also no concerns around GOLF’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for GOLF’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Acushnet Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GOLF’s future growth? Take a look at our free research report of analyst consensus for GOLF’s outlook.
- Valuation: What is GOLF 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 GOLF 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.
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 [email protected].
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