Yahoo Movies Is Ark Restaurants Corp’s (NASDAQ:ARKR) Balance Sheet A Threat To Its Future?
While small-cap stocks, such as Ark Restaurants Corp (NASDAQ:ARKR) with its market cap of US$88.62m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about 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’d encourage you to dig deeper yourself into ARKR here.
Does ARKR produce enough cash relative to debt?
ARKR has built up its total debt levels in the last twelve months, from US$7.94m to US$0 , which comprises of short- and long-term debt. With this increase in debt, ARKR currently has US$1.41m remaining in cash and short-term investments for investing into the business. On top of this, ARKR has produced cash from operations of US$10.35m during the same period of time, resulting in an operating cash to total debt ratio of 56.88%, indicating that ARKR’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 ARKR’s case, it is able to generate 0.57x cash from its debt capital.
Does ARKR’s liquid assets cover its short-term commitments?
With current liabilities at US$26.16m, it appears that the company is not able to meet these obligations given the level of current assets of US$10.08m, with a current ratio of 0.39x below the prudent level of 3x.
Can ARKR service its debt comfortably?
With a debt-to-equity ratio of 52.82%, ARKR can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if ARKR’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For ARKR, the ratio of 5.12x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ARKR’s high interest coverage is seen as responsible and safe practice.
Next Steps:
ARKR’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how ARKR has been performing in the past. I recommend you continue to research Ark Restaurants to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ARKR’s future growth? Take a look at our free research report of analyst consensus for ARKR’s outlook.
Historical Performance: What has ARKR’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 pass 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.
