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The Microcap Speculator submits: Reader Tim V. emailed me about the asset sale that Advocat Inc. (ticker: AVCA.ob) announced yesterday. Tim noted that the market reaction was tepid and that the sale would result in a charge of $4.5-$5 million. He asked for my take and here it is:

The sale, in my opinion, is unabashedly positive. I know they are selling the facilities for less than the existing mortgages. That is because the facilities lost money on both a GAAP and a cash flow basis. Think about the 11 North Carolina properties this way:

BEFORE: $18M debt / losing money

NOW: $4.5M-$5M debt / not losing money

Capital allocation is one of the most important tasks of any company. Advocat continues to allocate capital away from unprofitable facilities, and into profitable ones. As long as that trend continues, I will be a shareholder.

DISCLOSURE: I am long AVCA.OB. Not a recommendation to buy or sell any security. For informational and educational purposes only.

AVCA 1-Yr Chart

Source: Advocat Continues to Shore Up Balance Sheet (AVCA)