While small-cap stocks, such as LiNiu Technology Group (NASDAQ:LINU) with its market cap of US$20.98M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since LINU is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into LINU here.

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

Over the past year, LINU has ramped up its debt from US$44.74M to US$57.50M , which is mainly comprised of near term debt. With this growth in debt, LINU’s cash and short-term investments stands at US$73.31K for investing 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of LINU’s operating efficiency ratios such as ROA here.

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

Looking at LINU’s most recent US$75.35M liabilities, 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 0.034x, which is below the prudent industry ratio of 3x.

Can LINU service its debt comfortably?

With debt reaching 65.34% of equity, LINU may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since LINU is currently loss-making, sustainability of its current state of operations becomes a concern. 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, LINU has room for improvement to better cushion for events which may require debt repayment. 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 LINU has been performing in the past. I recommend you continue to research LiNiu Technology Group to get a more holistic view of the stock by looking at: