While small-cap stocks, such as Alkemy Sp.A. (BIT:ALK) with its market cap of €67.54M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into ALK here.

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

Over the past year, ALK has ramped up its debt from €1.41M to €3.11M , which comprises of short- and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at €2.91M , ready to deploy into the business. Additionally, ALK has generated cash from operations of €1.22M over the same time period, leading to an operating cash to total debt ratio of 39.18%, indicating that ALK’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ALK’s case, it is able to generate 0.39x cash from its debt capital.

Can ALK meet its short-term obligations with the cash in hand?

Looking at ALK’s most recent €11.86M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.46x. Usually, for Professional Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

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

ALK’s level of debt is appropriate relative to its total equity, at 23.91%. ALK is not taking on too much debt commitment, which may be constraining for future growth. We can test if ALK’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 ALK, the ratio of 35.08x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ALK ample headroom to grow its debt facilities.

Next Steps:

ALK’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, 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 ALK’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Alkemy to get a more holistic view of the stock by looking at: