What does Latin Resources Limited's (ASX:LRS) Balance Sheet Tell Us About Its Future?

While small-cap stocks, such as Latin Resources Limited (ASX:LRS) with its market cap of AU$28.85M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since LRS is loss-making right now, it’s crucial 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, since I only look at basic financial figures, I suggest you dig deeper yourself into LRS here.

Does LRS generate enough cash through operations?

LRS has shrunken its total debt levels in the last twelve months, from AU$1.54M to AU$500.00K made up of predominantly near term debt. With this debt payback, the current cash and short-term investment levels stands at AU$1.49M , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of LRS’s operating efficiency ratios such as ROA here.

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

With current liabilities at AU$1.47M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.14x. Usually, for Metals and Mining companies, this is a suitable ratio as there's enough of a cash buffer without holding too capital in low return investments.

Does LRS face the risk of succumbing to its debt-load?

With debt at 14.56% of equity, LRS may be thought of as appropriately levered. This range is considered safe as LRS is not taking on too much debt obligation, which may be constraining for future growth. Investors' risk associated with debt is very low with LRS, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

Although LRS’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how LRS has been performing in the past. You should continue to research Latin Resources to get a better picture of the stock by looking at:

• 1. Historical Performance: What has LRS'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.