While small-cap stocks, such as Credible Labs Inc (ASX:CRD) with its market cap of A$340.26M, 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 internet industry, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into CRD here.
How does CRD’s operating cash flow stack up against its debt?
Over the past year, CRD has borrowed debt capital of around $10.0M made up of current and long term debt. With this increase in debt, CRD currently has $14.1M remaining in cash and short-term investments for investing into the business. However, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 assess some of CRD’s operating efficiency ratios such as ROA here.
Can CRD meet its short-term obligations with the cash in hand?
Looking at CRD’s most recent $0.9M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $17.2M, leading to a 18.88x current account ratio. However, anything about 3x may be excessive, since CRD may be leaving too much capital in low-earning investments.
Does CRD face the risk of succumbing to its debt-load?
CRD is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since CRD is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? CRD’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that CRD’s financial situation may change. I suggest keeping abreast of market expectations for CRD’s future growth on our free analysis platform.