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While small-cap stocks, such as Online Brands Nordic AB (OM:OBAB) with its market cap of KR7.85M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Online Retail industry facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into OBAB here.
How does OBAB’s operating cash flow stack up against its debt?
OBAB has shrunken its total debt levels in the last twelve months, from KR5.22M to KR2.16M – this includes both the current and long-term debt. With this debt repayment, OBAB’s cash and short-term investments stands at KR977.00K for investing into the business. On top of this, OBAB has generated cash from operations of KR511.00K in the last twelve months, leading to an operating cash to total debt ratio of 23.66%, signalling that OBAB’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In OBAB’s case, it is able to generate 0.24x cash from its debt capital.
Can OBAB pay its short-term liabilities?
With current liabilities at KR16.05M, it appears that the company is not able to meet these obligations given the level of current assets of KR12.84M, with a current ratio of 0.8x below the prudent level of 3x.
Does OBAB face the risk of succumbing to its debt-load?
With total debt exceeding equities, OBAB is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since OBAB is currently unprofitable, sustainability of its current state of operations becomes a concern. 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:
OBAB’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for OBAB’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Online Brands Nordic to get a more holistic view of the stock by looking at: