While small-cap stocks, such as Tasty plc (AIM:TAST) with its market cap of UK£14.50M, 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 TAST 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. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into TAST here.
Does TAST generate an acceptable amount of cash through operations?
Over the past year, TAST has maintained its debt levels at around UK£7.00M comprising of short- and long-term debt. At this current level of debt, TAST currently has UK£1.84M remaining in cash and short-term investments , ready to deploy into the business. Moreover, TAST has produced cash from operations of UK£2.79M during the same period of time, resulting in an operating cash to total debt ratio of 39.79%, signalling that TAST’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In TAST’s case, it is able to generate 0.4x cash from its debt capital.
Does TAST’s liquid assets cover its short-term commitments?
With current liabilities at UK£9.79M, the company has been able to meet these commitments with a current assets level of UK£10.90M, leading to a 1.11x current account ratio. Usually, for Hospitality companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is TAST’s debt level acceptable?With debt at 31.74% of equity, TAST may be thought of as appropriately levered. TAST is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for TAST, and the company also has the ability and headroom to increase debt if needed going forward.
TAST has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, 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 TAST has been performing in the past. I suggest you continue to research Tasty to get a more holistic view of the stock by looking at:
- Historical Performance: What has TAST’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.