Investors are always looking for growth in small-cap stocks like Thomson Resources Ltd (ASX:TMZ), with a market cap of AUD A$4.33M. However, an important fact which most ignore is: how financially healthy is the business? Given that TMZ is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into TMZ here.

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

Over the past year, TMZ has borrowed debt capital of around A$0M . With this ramp up in debt, TMZ currently has A$0M remaining in cash and short-term investments , ready to deploy into the business. On top of this, TMZ has produced A$0M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 2.07x, meaning that TMZ’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In TMZ’s case, it is able to generate 2.07x cash from its debt capital.

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

With current liabilities at A$0M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.35x. For metals and mining companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

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

TMZ’s level of debt is low relative to its total equity, at 2.30%. TMZ is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is virtually non-existent with TMZ, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

Are you a shareholder? TMZ has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Moving forward, TMZ’s financial situation may change. I suggest researching market expectations for TMZ’s future growth on our free analysis platform.

Are you a potential investor? Although TMZ’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more conviction in the stock, you need to also analyse TMZ’s track record. As a following step, you should take a look at TMZ’s past performance analysis on our free platform to conclude on TMZ’s financial health.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.