Investors are always looking for growth in small-cap stocks like FuelCell Energy Inc (NASDAQ:FCEL), with a market cap of US$133.95M. However, an important fact which most ignore is: how financially healthy is the business? Given that FCEL is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into FCEL here.

Does FCEL generate an acceptable amount of cash through operations?

Over the past year, FCEL has ramped up its debt from US$95.22M to US$103.13M – this includes both the current and long-term debt. With this increase in debt, FCEL currently has US$49.29M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of FCEL’s operating efficiency ratios such as ROA here.

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

With current liabilities at US$98.08M, it appears that the company has been able to meet these obligations given the level of current assets of US$203.51M, with a current ratio of 2.07x. Generally, for Electrical companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Is FCEL’s debt level acceptable?

With debt reaching 54.39% of equity, FCEL may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since FCEL is presently 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:

FCEL’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 will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure FCEL has company-specific issues impacting its capital structure decisions. I suggest you continue to research FuelCell Energy to get a better picture of the stock by looking at: