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While small-cap stocks, such as Art's-Way Manufacturing Co., Inc. (NASDAQ:ARTW) with its market cap of US$9.0m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that ARTW is not presently profitable, it’s vital 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 not a comprehensive overview, so I’d encourage you to dig deeper yourself into ARTW here.

Does ARTW Produce Much Cash Relative To Its Debt?

ARTW's debt levels surged from US$4.9m to US$6.1m over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at under $10K, which is concerning. Moreover, its negative operating cash flow means calculating cash-to-debt wouldn't be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of ARTW’s operating efficiency ratios such as ROA here.

Does ARTW’s liquid assets cover its short-term commitments?

At the current liabilities level of US$6.0m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.12x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is ARTW’s debt level acceptable?

With a debt-to-equity ratio of 49%, ARTW can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since ARTW is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

ARTW’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ARTW's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure ARTW has company-specific issues impacting its capital structure decisions. I suggest you continue to research Art's-Way Manufacturing to get a more holistic view of the small-cap by looking at: