While small-cap stocks, such as Investis Holding SA (SWX:IREN) with its market cap of CHF796.16M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into IREN here.

Does IREN generate an acceptable amount of cash through operations?

IREN has shrunken its total debt levels in the last twelve months, from CHF366.28M to CHF344.30M , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at CHF58.25M , ready to deploy into the business. On top of this, IREN has produced CHF26.45M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 7.68%, signalling that IREN’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In IREN’s case, it is able to generate 0.077x cash from its debt capital.

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

At the current liabilities level of CHF62.17M liabilities, the company has been able to meet these commitments with a current assets level of CHF98.44M, leading to a 1.58x current account ratio. Usually, for Real Estate companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is IREN’s debt level acceptable?

With debt reaching 74.33% of equity, IREN 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. We can check to see whether IREN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In IREN’s, case, the ratio of 2.88x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.