While small-cap stocks, such as Pegasus Metals Limited (ASX:PUN) with its market cap of AU$3.50M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that PUN is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into PUN here.

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

Over the past year, PUN has ramped up its debt from AU$133.68K to AU$310.51K made up of predominantly near term debt. With this increase in debt, the current cash and short-term investment levels stands at under A$10K, which is rather low. Additionally, 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 assess some of PUN’s operating efficiency ratios such as ROA here.

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

With current liabilities at AU$2.28M, it seems that the business has not been able to meet these commitments with a current assets level of AU$303.29K, leading to a 0.13x current account ratio. which is under the appropriate industry ratio of 3x.

Can PUN service its debt comfortably?

Since total debt levels have outpaced equities, PUN is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since PUN is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

PUN’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, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how PUN has been performing in the past. I recommend you continue to research Pegasus Metals to get a more holistic view of the stock by looking at:

1. Historical Performance: What has PUN’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.