Small-cap companies such as Alt Resources Limited (ASX:ARS) with its market cap of USD $0 Million, have high growth potential but financial strength is the deciding factor in their long-term survival. On the surface, companies with a debt-to-equity ratio of less than 20% appear to have a sound debt structure, as is the case with ARS. But it is important you also look at other financial strength metrics to have the complete picture, like are they resilient enough to face an economic or industry downturn?
Primarily due to the lack of diversification in revenues geographically, often investors opt for a bundle of small-caps. On the other hand, well-versed investors allocate a small part of their portfolio capital to individual small-caps, primarily to improve its risk-return profile. However, that doesn’t reduce the risks these companies face individually. But I believe that it can be reduced to some extent by looking at these back of the hand balance sheet calculations. View our latest analysis for Alt Resources
Does Alt Resources’s liquidity position also indicate financial strength?
Despite low debt, for Alt Resources to continue operations during a downturn, it needs a sound liquidity position. When evaluating financial strength, I compare a company’s current assets (cash and liquid assets) to its total debt. ARS’s current assets ($1M) easily cover the total debt ($0M), giving it enough control on its balance sheet to survive a downturn.
Does ARS net enough to cover its debt-costs?
While operating cash flows are vital, earnings tell how profitable is the company, after also accounting for its gains and losses in non-core ventures and non-cash expenses such as depreciation and amortization. When a company earns enough to service its debt comfortably, this reflects its profitability and financial strength.An earnings to interest expense ratio of over five is a sign of good financial health as a company can easily cover those costs even if its earnings contract. In the case of ARS, the company has no debt.
Alt Resources fails to impress in terms of its operating cash flows compared to its overall-debt. However, the company does well on the earnings to interest-costs ratio. It appears ARS needs to increase the operational efficiency to be categorized as a financially healthy company. Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on Alt Resources to see what are ARS’s growth prospects and whether it could be considered an undervalued opportunity.
PS. If you are not interested in Alt Resources anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.