Champion Iron Limited (ASX:CIA) is a small-cap stock with a market capitalization of AU$559.83M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Since CIA is loss-making right now, it’s essential to assess 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, since I only look at basic financial figures, I recommend you dig deeper yourself into CIA here.

How does CIA’s operating cash flow stack up against its debt?

CIA has increased its debt level by about CA$43.61M over the last 12 months – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at CA$11.69M , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 take a look at some of CIA’s operating efficiency ratios such as ROA here.

Can CIA pay its short-term liabilities?

At the current liabilities level of CA$7.66M liabilities, the company has been able to meet these obligations given the level of current assets of CA$20.60M, with a current ratio of 2.69x. Usually, for Metals and Mining companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does CIA face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, CIA is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since CIA is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

CIA’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. Keep in mind I haven’t considered other factors such as how CIA has been performing in the past. I recommend you continue to research Champion Iron to get a better picture of the stock by looking at: