Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

While small-cap stocks, such as Atlas Arteria Limited (ASX:ALX) with its market cap of AU$5.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into ALX here.

ALX’s Debt (And Cash Flows)

Over the past year, ALX has ramped up its debt from AU$1.7b to AU$2.2b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$186m , ready to be used for running the business. On top of this, ALX has produced AU$23m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 1.1%, signalling that ALX’s debt is not covered by operating cash.

Can ALX pay its short-term liabilities?

With current liabilities at AU$115m, it seems that the business has been able to meet these obligations given the level of current assets of AU$189m, with a current ratio of 1.64x. The current ratio is the number you get when you divide current assets by current liabilities. For Infrastructure companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is ALX’s debt level acceptable?

With debt reaching 94% of equity, ALX may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.

Next Steps:

Although ALX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ALX's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how ALX has been performing in the past. I suggest you continue to research Atlas Arteria to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for ALX’s future growth? Take a look at our free research report of analyst consensus for ALX’s outlook.

2. Valuation: What is ALX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ALX is currently mispriced by the market.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.