Yahoo Finance How Financially Strong Is Arvida Group Limited (NZSE:ARV)?
Arvida Group Limited (NZSE:ARV) is a small-cap stock with a market capitalization of NZ$538m. 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? Healthcare companies, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into ARV here.
Does ARV produce enough cash relative to debt?
Over the past year, ARV has ramped up its debt from NZ$74m to NZ$123m , which includes long-term debt. With this rise in debt, ARV’s cash and short-term investments stands at NZ$3.1m , ready to deploy into the business. On top of this, ARV has generated NZ$54m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 44%, meaning that ARV’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ARV’s case, it is able to generate 0.44x cash from its debt capital.
Can ARV meet its short-term obligations with the cash in hand?
Looking at ARV’s NZ$122m in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.2x.
Can ARV service its debt comfortably?
ARV’s level of debt is appropriate relative to its total equity, at 24%. This range is considered safe as ARV is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether ARV 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 ARV’s, case, the ratio of 10.43x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
ARV’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure ARV has company-specific issues impacting its capital structure decisions. I suggest you continue to research Arvida Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ARV’s future growth? Take a look at our free research report of analyst consensus for ARV’s outlook.
Historical Performance: What has ARV’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.
