Investors are always looking for growth in small-cap stocks like LightwaveRF Plc (AIM:LWRF), with a market cap of GBP £7.46M. However, an important fact which most ignore is: how financially healthy is the company? There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for LightwaveRF
Does LWRF generate an acceptable amount of cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These catastrophes does not mean the company can stop servicing its debt obligations. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of LWRF, operating cash flow turned out to be -1.37x its debt level over the past twelve months. This means what LWRF can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at LWRF’s operations at this point in time.
Can LWRF pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, LWRF could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that LWRF is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Is LWRF’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For LWRF, the debt-to-equity ratio is 44.52%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet.