Arotech Corporation (NASDAQ:ARTX) is a small-cap stock with a market capitalization of US$81m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into ARTX here.
ARTX’s Debt (And Cash Flows)
ARTX’s debt levels have fallen from US$16m to US$14m over the last 12 months , which also accounts for long term debt. With this debt payback, ARTX currently has US$4.2m remaining in cash and short-term investments , ready to be used for running the business. On top of this, ARTX has produced cash from operations of US$3.3m in the last twelve months, leading to an operating cash to total debt ratio of 23%, meaning that ARTX’s operating cash is sufficient to cover its debt.
Does ARTX’s liquid assets cover its short-term commitments?
At the current liabilities level of US$28m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.97x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Aerospace & Defense companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can ARTX service its debt comfortably?
With a debt-to-equity ratio of 18%, ARTX’s debt level may be seen as prudent. ARTX is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether ARTX is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ARTX’s, case, the ratio of 3.71x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ARTX ample headroom to grow its debt facilities.
ARTX’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for ARTX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Arotech to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ARTX’s future growth? Take a look at our free research report of analyst consensus for ARTX’s outlook.
- Valuation: What is ARTX 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 ARTX 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.