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While small-cap stocks, such as SenSen Networks Limited (ASX:SNS) with its market cap of AU$44m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that SNS is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into SNS here.

SNS’s Debt (And Cash Flows)

SNS has shrunk its total debt levels in the last twelve months, from AU$1.4m to AU$1.0m , which includes long-term debt. With this reduction in debt, SNS currently has AU$4.1m remaining in cash and short-term investments to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn’t be useful. For this article’s sake, I won’t be looking at this today, but you can take a look at some of SNS’s operating efficiency ratios such as ROA here.

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

With current liabilities at AU$2.8m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.75x. The current ratio is the number you get when you divide current assets by current liabilities. For Software companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is SNS’s debt level acceptable?

With a debt-to-equity ratio of 36%, SNS’s debt level may be seen as prudent. SNS is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for SNS, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

SNS’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, 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 SNS has company-specific issues impacting its capital structure decisions. I recommend you continue to research SenSen Networks to get a more holistic view of the stock by looking at:

1. Historical Performance: What has SNS’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.