Are Organic Garage Ltd's (CVE:OG) Interest Costs Too High?

Organic Garage Ltd (CVE:OG) is a small-cap stock with a market capitalization of CA$6.73m. 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? Consumer Retailing businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into OG here.

How much cash does OG generate through its operations?

OG's debt levels have fallen from CA$890.63k to CA$513.26k over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at CA$1.91m for investing into the business. However, OG is only producing cash from operations of CA$19.50k during the same period of time, resulting in an operating cash to total debt ratio of less than 1x, signalling that the current level of operating cash is not enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In OG’s case, it produces less than 1x cash from its debt capital.

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

At the current liabilities level of CA$2.78m liabilities, the company has been able to meet these obligations given the level of current assets of CA$3.94m, with a current ratio of 1.41x. Generally, for Consumer Retailing companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

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

With a debt-to-equity ratio of 5.90%, OG's debt level is relatively low. OG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. OG's risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

OG’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for OG's financial health. Other important fundamentals need to be considered alongside. You should continue to research Organic Garage to get a better picture of the stock by looking at:

1. Historical Performance: What has OG'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.