While small-cap stocks, such as Nova Leap Health Corp (TSXV:NLH) with its market cap of CAD CA$7.43M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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 Nova Leap Health
Does NLH generate an acceptable amount of cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These adverse events bring devastation and yet does not absolve the company from its debt. 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. NLH’s recent operating cash flow was -3.53 times its debt within the past year. This means what NLH 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 NLH’s operations at this point in time.
Does NLH’s liquid assets cover its short-term commitments?
What about its other commitments such as payments to suppliers and salaries to its employees? During times of unfavourable events, NLH 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 NLH does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Does NLH face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. NLH’s debt-to-equity ratio exceeds 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, NLH has room for improvement to better cushion for events which may require debt repayment. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that NLH’s financial situation may change. I suggest keeping abreast of market expectations for NLH’s future growth on our free analysis platform.