Cyanotech Corporation (NASDAQ:CYAN) is a small-cap stock with a market capitalization of US$23.09m. 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? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into CYAN here.
How does CYAN’s operating cash flow stack up against its debt?
Over the past year, CYAN has reduced its debt from US$7.48m to US$6.95m , which is made up of current and long term debt. With this debt payback, CYAN’s cash and short-term investments stands at US$1.33m for investing into the business. Additionally, CYAN has generated cash from operations of US$1.49m in the last twelve months, leading to an operating cash to total debt ratio of 21.45%, indicating that CYAN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CYAN’s case, it is able to generate 0.21x cash from its debt capital.
Can CYAN pay its short-term liabilities?
At the current liabilities level of US$5.71m liabilities, the company has been able to meet these obligations given the level of current assets of US$13.62m, with a current ratio of 2.39x. Generally, for Personal Products companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is CYAN’s debt level acceptable?With a debt-to-equity ratio of 38.36%, CYAN’s debt level may be seen as prudent. This range is considered safe as CYAN is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether CYAN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CYAN’s, case, the ratio of 2.83x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although CYAN’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure CYAN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Cyanotech to get a better picture of the stock by looking at:
- Valuation: What is CYAN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CYAN is currently mispriced by the market.
- Historical Performance: What has CYAN’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.