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While small-cap stocks, such as Addvalue Technologies Ltd (SGX:A31) with its market cap of S$43m, 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 A31 is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into A31 here.

Does A31 Produce Much Cash Relative To Its Debt?

A31 has built up its total debt levels in the last twelve months, from US$2.2m to US$2.7m , which includes long-term debt. With this growth in debt, A31 currently has US$122k 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. 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 A31’s operating efficiency ratios such as ROA here.

Does A31’s liquid assets cover its short-term commitments?

Looking at A31’s US$6.3m in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$5.2m, with a current ratio of 0.83x. The current ratio is calculated by dividing current assets by current liabilities.

Is A31’s debt level acceptable?

With debt at 39% of equity, A31 may be thought of as appropriately levered. A31 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors' risk associated with debt is very low with A31, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

A31’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how A31 has been performing in the past. I suggest you continue to research Addvalue Technologies to get a better picture of the stock by looking at:

1. Historical Performance: What has A31'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.