iBuyNew Group Limited (ASX:IBN) is a small-cap stock with a market capitalization of AU$13.06M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Internet companies, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I recommend you dig deeper yourself into IBN here.

Does IBN generate enough cash through operations?

In the previous 12 months, IBN’s rose by about AU$1.76M made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at AU$1.45M , 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 examine some of IBN’s operating efficiency ratios such as ROA here.

Can IBN pay its short-term liabilities?

Looking at IBN’s most recent AU$2.45M liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$2.97M, leading to a 1.21x current account ratio. Usually, for Internet companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Is IBN’s debt level acceptable?

With total debt exceeding equities, IBN is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since IBN is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

At its current level of cash flow coverage, IBN has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how IBN has been performing in the past. I suggest you continue to research iBuyNew Group to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.