Inabox Group Limited (ASX:IAB) is a small-cap stock with a market capitalization of AU$15.48m. 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? Companies operating in the Telecom industry facing headwinds from current disruption, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes 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 suggest you dig deeper yourself into IAB here.
Does IAB produce enough cash relative to debt?
IAB has built up its total debt levels in the last twelve months, from AU$10.54m to AU$0 , which comprises of short- and long-term debt. With this growth in debt, IAB currently has AU$5.00m remaining in cash and short-term investments , ready to deploy into the business. Moreover, IAB has produced AU$4.16m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 30.58%, signalling that IAB’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In IAB’s case, it is able to generate 0.31x cash from its debt capital.
Can IAB meet its short-term obligations with the cash in hand?
With current liabilities at AU$23.43m, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.78x, which is below the prudent industry ratio of 3x.
Can IAB service its debt comfortably?With debt reaching 87.28% of equity, IAB may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since IAB is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although IAB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for IAB’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Inabox Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IAB’s future growth? Take a look at our free research report of analyst consensus for IAB’s outlook.
- Valuation: What is IAB 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 IAB is currently mispriced by the market.
- 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.