While small-cap stocks, such as IDT Australia Limited (ASX:IDT) with its market cap of AUD A$19.50M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Pharmaceuticals companies, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into IDT here.
Does IDT generate enough cash through operations?
Over the past year, IDT has reduced its debt from A$3M to A$1M , which is mainly comprised of near term debt. With this debt payback, the current cash and short-term investment levels stands at A$8M , ready to deploy into the business. On top of this, IDT has produced A$2M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 3.04x, indicating that IDT’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In IDT’s case, it is able to generate 3.04x cash from its debt capital.
Can IDT meet its short-term obligations with the cash in hand?
At the current liabilities level of A$6M 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 3.3x. However, anything above 3x is considered high and could mean that IDT has too much idle capital in low-earning investments.
Is IDT’s level of debt at an acceptable level?
With debt at 1.36% of equity, IDT may be thought of as having low leverage. This range is considered safe as IDT is not taking on too much debt obligation, which may be constraining for future growth. IDT’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? IDT’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 exhibits an ability to meet its near term obligations should an adverse event occur. In the future, IDT’s financial situation may change. You should always be keeping abreast of market expectations for IDT’s future growth on our free analysis platform.