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Cyclopharm Limited (ASX:CYC) is a small-cap stock with a market capitalization of AU$69.62m. 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? Companies operating in the Medical Equipment industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I suggest you dig deeper yourself into CYC here.
How does CYC’s operating cash flow stack up against its debt?
In the previous 12 months, CYC’s rose by about AU$174.87k made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$8.69m , 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of CYC’s operating efficiency ratios such as ROA here.
Can CYC pay its short-term liabilities?
With current liabilities at AU$5.21m, it seems that the business has been able to meet these commitments with a current assets level of AU$16.83m, leading to a 3.23x current account ratio. Though, a ratio greater than 3x may be considered as too high, as CYC could be holding too much capital in a low-return investment environment.
Is CYC’s debt level acceptable?
With debt at 1.01% of equity, CYC may be thought of as having low leverage. This range is considered safe as CYC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. CYC’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
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Although CYC’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. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for CYC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Cyclopharm to get a better picture of the stock by looking at: