Investors are always looking for growth in small-cap stocks like Zeta Resources Limited (ASX:ZER), with a market cap of AU$76.37M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes 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, since I only look at basic financial figures, I suggest you dig deeper yourself into ZER here.
Does ZER generate enough cash through operations?
ZER has shrunken its total debt levels in the last twelve months, from US$39.92M to US$27.61M – this includes both the current and long-term debt. With this debt repayment, ZER’s cash and short-term investments stands at US$15.83K , 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 assess some of ZER’s operating efficiency ratios such as ROA here.
Can ZER pay its short-term liabilities?
With current liabilities at US$260.42K, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.061x, which is below the prudent industry ratio of 3x.
Is ZER’s debt level acceptable?
With debt at 34.11% of equity, ZER may be thought of as appropriately levered. ZER is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if ZER’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For ZER, the ratio of 3.82x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ZER’s high interest coverage is seen as responsible and safe practice.
Next Steps:
ZER’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how ZER has been performing in the past. I suggest you continue to research Zeta Resources to get a better picture of the stock by looking at: