While small-cap stocks, such as Imagination Park Technologies Inc. (CNSX:IP) with its market cap of CA$7.1m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Software industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into IP here.
Does IP produce enough cash relative to debt?
IP’s debt levels surged from CA$500k to CA$2.0m over the last 12 months . With this rise in debt, the current cash and short-term investment levels stands at CA$2.5m , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of IP’s operating efficiency ratios such as ROA here.
Can IP meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$2.6m, the company has been able to meet these commitments with a current assets level of CA$2.6m, leading to a 1.02x current account ratio. Generally, for Software companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does IP face the risk of succumbing to its debt-load?
IP’s level of debt is appropriate relative to its total equity, at 29%. This range is considered safe as IP is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with IP, and the company has plenty of headroom and ability to raise debt should it need to in the future.
IP’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, 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 IP has company-specific issues impacting its capital structure decisions. You should continue to research Imagination Park Technologies 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.