While small-cap stocks, such as Poseidon Nickel Limited (ASX:POS) with its market cap of A$36.55M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into POS here.
How does POS’s operating cash flow stack up against its debt?
POS has sustained its debt level by about A$19.4M over the last 12 months – this includes both the current and long-term debt. At this current level of debt, POS currently has A$1.6M 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 take a look at some of POS’s operating efficiency ratios such as ROA here.
Does POS’s liquid assets cover its short-term commitments?
Looking at POS’s most recent A$4.4M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of A$1.9M, with a current ratio of 0.42x below the prudent level of 3x.
Is POS’s level of debt at an acceptable level?
With total debt exceeding equities, POS is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Next Steps:
Are you a shareholder? POS’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, POS’s financial situation may change. I recommend researching market expectations for POS’s future growth on our free analysis platform.
Are you a potential investor? POS’s high debt levels on top of low cash coverage of debt as well as low liquidity coverage of near-term expenses may scare some investors away intially. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of POS’s track record. I encourage you to continue your research by taking a look at POS’s past performance analysis on our free platform to conclude on POS’s financial health.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.