Investors are always looking for growth in small-cap stocks like Allegra Orthopaedics Limited (ASX:AMT), with a market cap of AUD A$13.18M. However, an important fact which most ignore is: how financially healthy is the company? 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. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. Check out our latest analysis for Allegra Orthopaedics
Does AMT 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. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, AMT’s operating cash flow was 0.99x its current debt. This is a good sign, as over half of AMT’s near term debt can be covered by its day-to-day cash income, which reduces its riskiness to its debtholders.
Does AMT’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, AMT 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 AMT is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Is AMT’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. In the case of AMT, the debt-to-equity ratio is 3.29%, which indicates that the company faces low risk associated with debt. While debt-to-equity ratio has several factors at play, an easier way to check whether AMT’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. AMT’s profits amply covers interest at 5.5 times, which is seen as relatively safe. Lenders may be less hesitant to lend out more funding as AMT’s high interest coverage is seen as responsible and safe practice.
Are you a shareholder? AMT has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Moving forward, its financial position may be different. You should always be keeping abreast of market expectations for AMT’s future growth on our free analysis platform.
Are you a potential investor? AMT’s high cash coverage and low levels of debt indicate its ability to use its borrowings efficiently in order to produce a healthy cash flow. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to further analyse the company’s track record. You should continue your analysis by taking a look at AMT’s past performance analysis on our free platform to conclude on AMT’s financial health.