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While small-cap stocks, such as Phoslock Water Solutions Limited (ASX:PHK) with its market cap of AU$144.54M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since PHK is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PHK here.
Does PHK generate enough cash through operations?
PHK’s debt levels surged from AU$943.55K to AU$1.79M over the last 12 months made up of predominantly near term debt. With this increase in debt, PHK currently has AU$1.23M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of PHK’s operating efficiency ratios such as ROA here.
Can PHK meet its short-term obligations with the cash in hand?
Looking at PHK’s most recent AU$2.56M liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$3.45M, leading to a 1.34x current account ratio. For Commercial Services companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does PHK face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 2.45%, PHK’s debt level is relatively low. PHK is not taking on too much debt commitment, which may be constraining for future growth. PHK’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
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PHK’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure PHK has company-specific issues impacting its capital structure decisions. You should continue to research Phoslock Water Solutions to get a better picture of the stock by looking at: