QUIZ plc (AIM:QUIZ) is a small-cap stock with a market capitalization of UK£180.45M. 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? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into QUIZ here.

Does QUIZ generate enough cash through operations?

QUIZ has built up its total debt levels in the last twelve months, from UK£2.74M to UK£4.07M , which is made up of current and long term debt. With this growth in debt, QUIZ’s cash and short-term investments stands at UK£2.06M for investing into the business. Additionally, QUIZ has produced UK£3.24M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 79.72%, meaning that QUIZ’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In QUIZ’s case, it is able to generate 0.8x cash from its debt capital.

Can QUIZ meet its short-term obligations with the cash in hand?

At the current liabilities level of UK£14.96M liabilities, the company has been able to meet these commitments with a current assets level of UK£22.10M, leading to a 1.48x current account ratio. Generally, for Luxury companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Does QUIZ face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 1.28%, QUIZ’s debt level is relatively low. QUIZ is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether QUIZ is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In QUIZ’s, case, the ratio of 424x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

QUIZ has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how QUIZ has been performing in the past. I suggest you continue to research QUIZ to get a better picture of the stock by looking at: