While small-cap stocks, such as On Track Innovations Ltd (NASDAQ:OTIV) with its market cap of USD $46.89M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for OTIV

Does OTIV generate an acceptable amount of cash through operations?

While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These adverse events bring devastation and yet does not absolve the company from its debt. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. OTIV’s recent operating cash flow was -0.79 times its debt within the past year. This means what OTIV can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at OTIV’s operations at this point in time.

Does OTIV’s liquid assets cover its short-term commitments?

What about its other commitments such as payments to suppliers and salaries to its employees? During times of unfavourable events, OTIV could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that OTIV does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

Can OTIV service its debt comfortably?

While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For OTIV, the debt-to-equity ratio is 40.99%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet.

Next Steps:

Are you a shareholder? OTIV’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that OTIV’s financial situation may change. I recommend keeping on top of market expectations for OTIV’s future growth on our free analysis platform.

Are you a potential investor? Though near-term liquidity isn’t an issue, OTIV’s high debt levels on top of poor cash coverage may send potential investors running the other way. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of OTIV’s track record. You should continue your analysis by taking a look at OTIV’s past performance analysis on our free platform to conclude on OTIV’s financial health.

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.