While small-cap stocks, such as Houston American Energy Corp (AMEX:HUSA) with its market cap of USD $23.38M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Check out our latest analysis for Houston American Energy

Does HUSA generate enough cash through operations?

Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These catastrophes does not mean the company can stop servicing its debt obligations. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of HUSA, operating cash flow turned out to be -2.96x its debt level over the past twelve months. This means what HUSA can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at HUSA’s operations at this point in time.

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

In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. During times of unfavourable events, HUSA could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for HUSA’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that HUSA is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.

Is HUSA’s level of debt at an acceptable level?

Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. In the case of HUSA, the debt-to-equity ratio is 10.55%, which means its debt level does not pose a threat to its operations right now.

Next Steps:

Are you a shareholder? Although HUSA’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may be different. I suggest keeping abreast of market expectations for HUSA’s future growth on our free analysis platform.