While small-cap stocks, such as Invigor Group Limited (ASX:IVO) with its market cap of AU$8.76M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Internet industry, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into IVO here.
Does IVO generate an acceptable amount of cash through operations?
Over the past year, IVO has ramped up its debt from AU$7.60M to AU$11.12M , which comprises of short- and long-term debt. With this growth in debt, IVO’s cash and short-term investments stands at AU$511.00K for investing 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 examine some of IVO’s operating efficiency ratios such as ROA here.
Can IVO meet its short-term obligations with the cash in hand?
With current liabilities at AU$11.59M, it appears that the company has not been able to meet these commitments with a current assets level of AU$2.46M, leading to a 0.21x current account ratio. which is under the appropriate industry ratio of 3x.
Can IVO service its debt comfortably?Since total debt levels have outpaced equities, IVO is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since IVO is currently loss-making, 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.
IVO’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. I admit this is a fairly basic analysis for IVO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Invigor Group to get a better picture of the stock by looking at:
- Historical Performance: What has IVO’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.