While small-cap stocks, such as Alterra Limited (ASX:1AG) with its market cap of AUD A$5.74M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Alterra

How does 1AG’s operating cash flow stack up against its debt?

Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of 1AG, operating cash flow turned out to be 0.26x its debt level over the past twelve months. This is a good sign, as over a quarter of 1AG’s near term debt can be covered by its day-to-day cash income, which reduces its riskiness to its debtholders.

Can 1AG pay its short-term liabilities?

What about its other commitments such as payments to suppliers and salaries to its employees? In times of adverse events, 1AG may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that 1AG is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.

Does 1AG face the risk of succumbing to its debt-load?

Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. 1AG’s debt-to-equity ratio stands at 16.23%, which means its risk of facing a debt-overhang is very low.

Next Steps:

Are you a shareholder? 1AG has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. In the future, 1AG’s financial situation may change. I recommend keeping on top of market expectations for 1AG’s future growth on our free analysis platform.