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Investors are always looking for growth in small-cap stocks like Allied Motion Technologies Inc. (NASDAQ:AMOT), with a market cap of US$349m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes vital, as mismanagement of capital can lead to 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. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into AMOT here.
Does AMOT Produce Much Cash Relative To Its Debt?
AMOT has built up its total debt levels in the last twelve months, from US$53m to US$123m – this includes long-term debt. With this rise in debt, AMOT currently has US$8.7m remaining in cash and short-term investments to keep the business going. Additionally, AMOT has produced US$17m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 14%, meaning that AMOT’s operating cash is less than its debt.
Does AMOT’s liquid assets cover its short-term commitments?
With current liabilities at US$45m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.49x. The current ratio is the number you get when you divide current assets by current liabilities. For Electrical companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is AMOT’s debt level acceptable?
Since total debt levels exceed equity, AMOT is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether AMOT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AMOT’s, case, the ratio of 8.88x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as AMOT’s high interest coverage is seen as responsible and safe practice.
Although AMOT’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 AMOT’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 AMOT has been performing in the past. I recommend you continue to research Allied Motion Technologies to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMOT’s future growth? Take a look at our free research report of analyst consensus for AMOT’s outlook.
- Valuation: What is AMOT 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 AMOT is currently mispriced by the market.
- 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 firstname.lastname@example.org. 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.