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Darco Water Technologies Limited (SGX:BLR) is a small-cap stock with a market capitalization of S$33.45M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. 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 BLR here.

Does BLR generate an acceptable amount of cash through operations?

Over the past year, BLR has ramped up its debt from S$1.90M to S$4.17M , which is made up of current and long term debt. With this increase in debt, BLR currently has S$8.16M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 BLR’s operating efficiency ratios such as ROA here.

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

Looking at BLR’s most recent S$34.11M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.57x. Usually, for Machinery companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is BLR’s debt level acceptable?

With debt at 13.89% of equity, BLR may be thought of as appropriately levered. This range is considered safe as BLR is not taking on too much debt obligation, which may be constraining for future growth.

Next Steps:

Although BLR’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how BLR has been performing in the past. You should continue to research Darco Water Technologies to get a better picture of the stock by looking at:

• 1. Historical Performance: What has BLR’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

• 2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.