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Angel Seafood Holdings Limited (ASX:AS1) is a small-cap stock with a market capitalization of AU$25.74M. 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? Since AS1 is loss-making right now, it’s vital 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. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into AS1 here.

How does AS1’s operating cash flow stack up against its debt?

AS1 currently has AU$1.36M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of AS1’s operating efficiency ratios such as ROA here.

Can AS1 meet its short-term obligations with the cash in hand?

At the current liabilities level of AU$1.03M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$2.58M, with a current ratio of 2.51x. Usually, for Food companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does AS1 face the risk of succumbing to its debt-load?

With debt at 22.81% of equity, AS1 may be thought of as appropriately levered. AS1 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for AS1, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

AS1’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how AS1 has been performing in the past. I suggest you continue to research Angel Seafood Holdings to get a better picture of the stock by looking at:

• 1. Historical Performance: What has AS1’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.