AstiVita Limited (ASX:AIR) is a small-cap stock with a market capitalization of AUD A$3.50M. 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? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for AIR

Does AIR generate enough cash through operations?

Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These catastrophes does not mean the company can stop servicing its debt obligations. Can AIR pay off what it owes to its debtholder by using only cash from its operational activities? In the case of AIR, operating cash flow turned out to be -0.51x its debt level over the past twelve months. This means what AIR can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at AIR’s operations at this point in time.

Can AIR pay its short-term liabilities?

What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, AIR could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for AIR’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that AIR 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.

Is AIR’s level of debt at an acceptable level?

Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. AIR’s debt-to-equity ratio stands at 28.85%, which means its debt level does not pose a threat to its operations right now.

Next Steps:

Are you a shareholder? Although AIR’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may be different. You should always be keeping abreast of market expectations for AIR’s future growth on our free analysis platform.

Are you a potential investor? AIR’s low-debt position gives it headroom for future growth funding in the future. Furthermore, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your conviction in the stock, you need to further analyse the company’s track record. As a following step, you should take a look at AIR’s past performance analysis on our free platform to figure out AIR’s financial health position.

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.