While small-cap stocks, such as Tower One Wireless Corp (CNSX:TO) with its market cap of CA$14.00m, 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 TO is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into TO here.
How much cash does TO generate through its operations?
Over the past year, TO has borrowed debt capital of around CA$1.62m . With this increase in debt, TO’s cash and short-term investments stands at CA$433.06k , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of TO’s operating efficiency ratios such as ROA here.
Does TO’s liquid assets cover its short-term commitments?
Looking at TO’s most recent CA$2.85m liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.43x, which is below the prudent industry ratio of 3x.
Does TO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 45.51%, TO can be considered as an above-average 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 TO is currently 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.Next Steps:
At its current level of cash flow coverage, TO has room for improvement to better cushion for events which may require debt repayment. In addition to this, 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 TO has been performing in the past. I recommend you continue to research Tower One Wireless to get a more holistic view of the stock by looking at:
- Historical Performance: What has TO’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.