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Innovotech Inc. (CVE:IOT) is a small-cap stock with a market capitalization of CA$2.0m. 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? Since IOT is loss-making right now, it’s essential 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. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into IOT here.
Does IOT Produce Much Cash Relative To Its Debt?
IOT’s debt level has been constant at around CA$100k over the previous year made up of predominantly near term debt. At this current level of debt, IOT currently has CA$29k remaining in cash and short-term investments , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can examine some of IOT’s operating efficiency ratios such as ROA here.
Can IOT pay its short-term liabilities?
With current liabilities at CA$179k, it seems that the business has been able to meet these commitments with a current assets level of CA$211k, leading to a 1.18x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Life Sciences companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can IOT service its debt comfortably?
IOT is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since IOT is presently loss-making, 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.
At its current level of cash flow coverage, IOT has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure IOT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Innovotech to get a more holistic view of the stock by looking at:
- Historical Performance: What has IOT’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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.