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While small-cap stocks, such as Peak Resources Limited (ASX:PEK) with its market cap of AU$30.88M, 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 PEK is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into PEK here.
Does PEK generate an acceptable amount of cash through operations?
PEK’s debt levels surged from AU$2.21M to AU$9.18M over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, PEK currently has AU$2.13M 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of PEK’s operating efficiency ratios such as ROA here.
Can PEK meet its short-term obligations with the cash in hand?
Looking at PEK’s most recent AU$788.51K liabilities, it appears that the company has been able to meet these commitments with a current assets level of AU$3.44M, leading to a 4.37x current account ratio. Though, a ratio greater than 3x may be considered as too high, as PEK could be holding too much capital in a low-return investment environment.
Is PEK’s debt level acceptable?
With debt at 29.15% of equity, PEK may be thought of as appropriately levered. This range is considered safe as PEK is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with PEK, and the company has plenty of headroom and ability to raise debt should it need to in the future.
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PEK’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for PEK’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Peak Resources to get a better picture of the stock by looking at: