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Investors are always looking for growth in small-cap stocks like Holista CollTech Limited (ASX:HCT), with a market cap of AU$16m. However, an important fact which most ignore is: how financially healthy is the business? Since HCT is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into HCT here.

Does HCT Produce Much Cash Relative To Its Debt?

HCT's debt levels surged from AU$757k to AU$880k over the last 12 months , which includes long-term debt. With this increase in debt, HCT's cash and short-term investments stands at AU$358k , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of HCT’s operating efficiency ratios such as ROA here.

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

With current liabilities at AU$2.3m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.06x. The current ratio is calculated by dividing current assets by current liabilities. For Personal Products companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can HCT service its debt comfortably?

With a debt-to-equity ratio of 19%, HCT's debt level may be seen as prudent. This range is considered safe as HCT is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for HCT, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

HCT’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I'm sure HCT has company-specific issues impacting its capital structure decisions. I suggest you continue to research Holista CollTech to get a better picture of the stock by looking at: