Investors are always looking for growth in small-cap stocks like Imagination Park Entertainment Inc (CNSX:IP), with a market cap of CA$18.52m. However, an important fact which most ignore is: how financially healthy is the business? Given that IP is not presently profitable, it’s essential to evaluate 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, this commentary is still very high-level, so I recommend you dig deeper yourself into IP here.
How much cash does IP generate through its operations?
Over the past year, IP has borrowed debt capital of around CA$5.08k , which is mainly comprised of near term debt. With this ramp up in debt, IP currently has CA$528.40k remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 assess some of IP’s operating efficiency ratios such as ROA here.
Does IP’s liquid assets cover its short-term commitments?
Looking at IP’s most recent CA$306.92k liabilities, the company has been able to meet these commitments with a current assets level of CA$591.26k, leading to a 1.93x current account ratio. Usually, for Media companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can IP service its debt comfortably?With debt reaching 45.88% of equity, IP 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 IP is presently unprofitable, 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.
IP’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how IP has been performing in the past. I suggest you continue to research Imagination Park Entertainment to get a better picture of the stock by looking at:
- Historical Performance: What has IP’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.