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XTEK Limited (ASX:XTE) is a small-cap stock with a market capitalization of AU$16m. 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? Given that XTE is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into XTE here.

Does XTE Produce Much Cash Relative To Its Debt?

In the previous 12 months, XTE's rose by about AU$1.3m accounting for long term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$6.6m to keep the business going. Additionally, XTE has produced AU$4.7m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 352%, meaning that XTE’s operating cash is sufficient to cover its debt.

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

Looking at XTE’s AU$6.3m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$12m, leading to a 1.84x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Aerospace & Defense companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

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

XTE’s level of debt is appropriate relative to its total equity, at 22%. This range is considered safe as XTE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. XTE's risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

XTE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, 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 XTE's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research XTEK to get a more holistic view of the stock by looking at: