InnSuites Hospitality Trust (AMEX:IHT) is a small-cap stock with a market capitalization of US$20.94M. 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? Given that IHT is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. 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’d encourage you to dig deeper yourself into IHT here.
Does IHT generate an acceptable amount of cash through operations?
Over the past year, IHT has ramped up its debt from US$14.78M to US$16.38M – this includes both the current and long-term debt. With this growth in debt, IHT currently has US$583.20K remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 take a look at some of IHT’s operating efficiency ratios such as ROA here.
Can IHT pay its short-term liabilities?
Looking at IHT’s most recent US$4.41M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of US$1.46M, leading to a 0.33x current account ratio. which is under the appropriate industry ratio of 3x.
Is IHT’s debt level acceptable?With total debt exceeding equities, IHT is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since IHT 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.
IHT’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for IHT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research InnSuites Hospitality Trust to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has IHT’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.
- 2. 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.