Investors are always looking for growth in small-cap stocks like Allied Motion Technologies Inc. (NASDAQ:AMOT), with a market cap of US$332m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, these checks don’t give you a full picture, so I recommend you dig deeper yourself into AMOT here.
Does AMOT Produce Much Cash Relative To Its Debt?
Over the past year, AMOT has ramped up its debt from US$53m to US$123m , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$8.7m to keep the business going. Additionally, AMOT has produced US$17m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 14%, indicating that AMOT’s operating cash is less than its debt.
Can AMOT meet its short-term obligations with the cash in hand?
Looking at AMOT’s US$45m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$111m, with a current ratio of 2.49x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Electrical companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can AMOT service its debt comfortably?
With total debt exceeding equity, AMOT is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if AMOT’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 AMOT, the ratio of 8.88x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as AMOT’s high interest coverage is seen as responsible and safe practice.
AMOT’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for AMOT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Allied Motion Technologies to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMOT’s future growth? Take a look at our free research report of analyst consensus for AMOT’s outlook.
- Valuation: What is AMOT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AMOT is currently mispriced by the market.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.