Investors are always looking for growth in small-cap stocks like IXYS Corporation (NASDAQ:IXYS), with a market cap of USD $760.24M. However, an important fact which most ignore is: how financially healthy is the company? 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. 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. See our latest analysis for IXYS

Does IXYS generate an acceptable amount of 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 adverse events bring devastation and yet does not absolve the company from its debt. Can IXYS pay off what it owes to its debtholder by using only cash from its operational activities? In the case of IXYS, operating cash flow turned out to be 0.35x its debt level over the past twelve months. A ratio of over a 0.25x is a positive sign and shows that IXYS is generating ample cash from its core business, which should increase its potential to pay back near-term debt.

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

What about its other commitments such as payments to suppliers and salaries to its employees? As cash flow from operation is hindered by adverse events, IXYS may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that IXYS does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

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

A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For IXYS, the debt-to-equity ratio is 24.02%, which indicates that its debt is at an acceptable level. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. IXYS’s interest on debt is sufficiently covered by earnings as it sits at around 15.15x. Lenders may be less hesitant to lend out more funding as IXYS’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Are you a shareholder? IXYS has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate 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, IXYS’s financial situation may change. You should always be keeping on top of market expectations for IXYS’s future growth on our free analysis platform.

Are you a potential investor? IXYS’s relatively safe debt levels is even more impressive due to its ability to generate high cash flow, which illustrates operating efficiency. Moreover, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to also analyse IXYS’s track record. I encourage you to continue your research by taking a look at IXYS’s past performance analysis on our free platform to conclude on IXYS’s financial health.

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.