Are On Track Innovations Ltd’s (NASDAQ:OTIV) Interest Costs Too High?

On Track Innovations Ltd (NASDAQ:OTIV) is a small-cap stock with a market capitalization of US$51.06M. 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? Companies operating in the Tech industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into OTIV here.

How does OTIV’s operating cash flow stack up against its debt?

OTIV’s debt levels have fallen from US$5.58M to US$5.00M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, OTIV currently has US$10.07M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of OTIV’s operating efficiency ratios such as ROA here.

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

At the current liabilities level of US$12.87M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$20.47M, with a current ratio of 1.59x. Generally, for Tech companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

NasdaqCM:OTIV Historical Debt May 21st 18
NasdaqCM:OTIV Historical Debt May 21st 18

Does OTIV face the risk of succumbing to its debt-load?

With debt reaching 40.38% of equity, OTIV may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since OTIV is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

OTIV’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how OTIV has been performing in the past. I recommend you continue to research On Track Innovations to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for OTIV’s future growth? Take a look at our free research report of analyst consensus for OTIV’s outlook.
  2. Valuation: What is OTIV 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 OTIV is currently mispriced by the market.
  3. 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.