Investors are always looking for growth in small-cap stocks like Truett-Hurst Inc (NASDAQ:THST), with a market cap of US$13.50M. However, an important fact which most ignore is: how financially healthy is the business? Given that THST is not presently profitable, it’s crucial to understand 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, this commentary is still very high-level, so I recommend you dig deeper yourself into THST here.

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

Over the past year, THST has reduced its debt from US$14.10M to US$10.86M , which is made up of current and long term debt. With this debt payback, THST currently has US$791.00K remaining in cash and short-term investments for investing into the business. On top of this, THST has generated cash from operations of US$651.00K during the same period of time, resulting in an operating cash to total debt ratio of 6.00%, signalling that THST’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In THST’s case, it is able to generate 0.06x cash from its debt capital.

Can THST meet its short-term obligations with the cash in hand?

With current liabilities at US$10.83M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.2x. Usually, for Beverage 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.

Does THST face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 77.70%, THST can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since THST is currently unprofitable, there’s a question of sustainability of its current operations. 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:

THST’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for THST’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Truett-Hurst to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.