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While small-cap stocks, such as Spark Networks SE (NYSEMKT:LOV) with its market cap of US$140m, 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 LOV is not presently profitable, it’s crucial to understand 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. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into LOV here.
LOV’s Debt (And Cash Flows)
Over the past year, LOV has ramped up its debt from €5.9m to €12m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at €11m to keep the business going. Additionally, LOV has generated cash from operations of €8.5m over the same time period, resulting in an operating cash to total debt ratio of 70%, signalling that LOV’s current level of operating cash is high enough to cover debt.
Can LOV pay its short-term liabilities?
Looking at LOV’s €34m in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.54x. The current ratio is calculated by dividing current assets by current liabilities.
Does LOV face the risk of succumbing to its debt-load?
With debt reaching 62% of equity, LOV may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since LOV is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
LOV’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for LOV’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Spark Networks to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LOV’s future growth? Take a look at our free research report of analyst consensus for LOV’s outlook.
- Valuation: What is LOV 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 LOV is currently mispriced by the market.
- 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 email@example.com. 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.