Investors are always looking for growth in small-cap stocks like Inabox Group Limited (ASX:IAB), with a market cap of AU$9.77M. However, an important fact which most ignore is: how financially healthy is the business? Telecom businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into IAB here.
Does IAB generate an acceptable amount of cash through operations?
IAB has built up its total debt levels in the last twelve months, from AU$10.54M to AU$13.59M , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$5.00M for investing into the business. Moreover, IAB has generated AU$4.16M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 30.58%, indicating that IAB’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In IAB’s case, it is able to generate 0.31x cash from its debt capital.
Does IAB’s liquid assets cover its short-term commitments?
With current liabilities at AU$23.43M, 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 0.78x, which is below the prudent industry ratio of 3x.
Can IAB service its debt comfortably?IAB is a relatively highly levered company with a debt-to-equity of 87.28%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since IAB 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.
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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how IAB has been performing in the past. You should continue to research Inabox Group to get a better picture of the stock by looking at:
- 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.
- Historical Performance: What has IAB’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.