While small-cap stocks, such as Sprintex Limited (ASX:SIX) with its market cap of A$14.00M, 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 SIX is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into SIX here.
Does SIX generate an acceptable amount of cash through operations?
Over the past year, SIX has reduced its debt from A$2.7M to A$0.3M made up of predominantly near term debt. With this reduction in debt, SIX’s cash and short-term investments stands at A$0.2M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of SIX’s operating efficiency ratios such as ROA here.
Does SIX’s liquid assets cover its short-term commitments?
With current liabilities at A$2.1M, the company is not able to meet these obligations given the level of current assets of A$1.4M, with a current ratio of 0.68x below the prudent level of 3x.
Can SIX service its debt comfortably?Since total debt levels have outpaced equities, SIX is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since SIX is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
SIX’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for SIX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Sprintex to get a better picture of the stock by looking at:
1. Historical Performance: What has SIX’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
2. 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.