YPB Group Limited (ASX:YPB) is a small-cap stock with a market capitalization of AU$11.82M. 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? Since YPB is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I suggest you dig deeper yourself into YPB here.
How does YPB’s operating cash flow stack up against its debt?
Over the past year, YPB has reduced its debt from AU$3.02M to AU$2.84M , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at AU$845.00K , ready to deploy into the business. Moving onto cash from operations, its small level of 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 assess some of YPB’s operating efficiency ratios such as ROA here.
Can YPB pay its short-term liabilities?
At the current liabilities level of AU$9.86M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.17x, which is below the prudent industry ratio of 3x.
Does YPB face the risk of succumbing to its debt-load?YPB is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since YPB is presently 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.
YPB’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, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure YPB has company-specific issues impacting its capital structure decisions. I suggest you continue to research YPB Group to get a better picture of the stock by looking at:
- Valuation: What is YPB 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 YPB is currently mispriced by the market.
- Historical Performance: What has YPB’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.
- 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.