How Financially Strong Is Cycliq Group Limited (ASX:CYQ)?

While small-cap stocks, such as Cycliq Group Limited (ASX:CYQ) with its market cap of AU$2.9m, 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 CYQ is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, these checks don’t give you a full picture, so I suggest you dig deeper yourself into CYQ here.

Does CYQ Produce Much Cash Relative To Its Debt?

CYQ has increased its debt level by about AU$510k over the last 12 months , which is mainly comprised of near term debt. With this ramp up in debt, the current cash and short-term investment levels stands at AU$560k to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn’t be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of CYQ’s operating efficiency ratios such as ROA here.

Can CYQ meet its short-term obligations with the cash in hand?

At the current liabilities level of AU$1.8m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. The current ratio is the number you get when you divide current assets by current liabilities. For Leisure 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.

ASX:CYQ Historical Debt, April 22nd 2019
ASX:CYQ Historical Debt, April 22nd 2019

Can CYQ service its debt comfortably?

With debt reaching 43% of equity, CYQ 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. But since CYQ 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:

Although CYQ’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 CYQ’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for CYQ’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Cycliq Group to get a better picture of the small-cap by looking at:

  1. Historical Performance: What has CYQ’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.

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.