While small-cap stocks, such as Australian Whisky Holdings Limited (ASX:AWY) with its market cap of AU$13.22M, 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 AWY is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into AWY here.

How does AWY’s operating cash flow stack up against its debt?

AWY has built up its total debt levels in the last twelve months, from AU$1.52M to AU$8.38M , which is made up of current and long term debt. With this increase in debt, AWY’s cash and short-term investments stands at AU$860.98K , ready to deploy 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 take a look at some of AWY’s operating efficiency ratios such as ROA here.

Does AWY’s liquid assets cover its short-term commitments?

At the current liabilities level of AU$3.27M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.75x, which is below the prudent industry ratio of 3x.

Is AWY’s debt level acceptable?

With total debt exceeding equities, AWY is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since AWY is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

With a high level of debt on its balance sheet, AWY could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for AWY to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for AWY’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Australian Whisky Holdings to get a better picture of the stock by looking at: