Is On Track Innovations Ltd's (NASDAQ:OTIV) Balance Sheet A Threat To Its Future?

On Track Innovations Ltd (NASDAQ:OTIV) is a small-cap stock with a market capitalization of US$44.06m. 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, in particular ones that run negative earnings, 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. Though, 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?

Over the past year, OTIV has reduced its debt from US$5.62m to US$4.94m , which is made up of current and long term debt. With this debt repayment, OTIV's cash and short-term investments stands at US$9.50m for investing into the business. On top of this, OTIV has produced cash from operations of US$766.00k in the last twelve months, resulting in an operating cash to total debt ratio of 15.51%, meaning that OTIV’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In OTIV’s case, it is able to generate 0.16x cash from its debt capital.

Can OTIV pay its short-term liabilities?

At the current liabilities level of US$12.61m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.57x. For Tech companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too capital in low return investments.

Is OTIV’s debt level acceptable?

With a debt-to-equity ratio of 40.38%, OTIV can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since OTIV is presently unprofitable, 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:

At its current level of cash flow coverage, OTIV has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure OTIV has company-specific issues impacting its capital structure decisions. 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.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.