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While small-cap stocks, such as Ovation Science Inc. (CNSX:OVAT) with its market cap of CA$14m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that OVAT is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into OVAT here.
OVAT’s Debt (And Cash Flows)
OVAT has sustained its debt level by about CA$305k over the last 12 months , which is mainly comprised of near term debt. At this current level of debt, the current cash and short-term investment levels stands at CA$278k , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of OVAT’s operating efficiency ratios such as ROA here.
Does OVAT’s liquid assets cover its short-term commitments?
Looking at OVAT’s CA$334k in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of CA$293k, leading to a current ratio of 0.88x. The current ratio is calculated by dividing current assets by current liabilities.
Is OVAT’s debt level acceptable?
OVAT is a relatively highly levered company with a debt-to-equity of 54%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since OVAT is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although OVAT’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for OVAT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Ovation Science to get a better picture of the stock by looking at:
- Historical Performance: What has OVAT’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.
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