Investors are always looking for growth in small-cap stocks like Locality Planning Energy Holdings Limited (ASX:LPE), with a market cap of AU$47.70M. However, an important fact which most ignore is: how financially healthy is the business? Given that LPE is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into LPE here.

Does LPE generate an acceptable amount of cash through operations?

Over the past year, LPE has ramped up its debt from AU$278.16K to AU$1.30M , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$3.98M , 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 LPE’s operating efficiency ratios such as ROA here.

Can LPE pay its short-term liabilities?

Looking at LPE’s most recent AU$1.79M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.32x. Though, a ratio greater than 3x may be considered as too high, as LPE could be holding too much capital in a low-return investment environment.

Can LPE service its debt comfortably?

With debt at 19.75% of equity, LPE may be thought of as appropriately levered. LPE is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for LPE, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

LPE’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. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for LPE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Locality Planning Energy Holdings to get a better picture of the stock by looking at:

• 1. Historical Performance: What has LPE’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.

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.