Investors are always looking for growth in small-cap stocks like Sonoma Pharmaceuticals Inc (NASDAQ:SNOA), with a market cap of USD $19.24M. However, an important fact which most ignore is: how financially healthy is the company? Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. See our latest analysis for SNOA

Does SNOA generate enough cash through operations?

There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These catastrophes does not mean the company can stop servicing its debt obligations. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. Last year, SNOA’s operating cash flow was -23.37x its current debt. This means what SNOA can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at SNOA’s operations at this point in time.

Can SNOA pay its short-term liabilities?

In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. In times of adverse events, SNOA may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that SNOA does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

Can SNOA service its debt comfortably?

While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. SNOA’s debt-to-equity ratio stands at 2.76%, which means debt is low and does not pose any significant threat to the company’s operations. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. In SNOA’s case, its interest is excessively covered by its earnings as the ratio sits at 181.7x. Debtors may be willing to loan the company more money, giving SNOA ample headroom to grow its debt facilities.

Next Steps:

Are you a shareholder? SNOA’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that SNOA’s financial situation may change. I suggest keeping on top of market expectations for SNOA’s future growth on our free analysis platform.

Are you a potential investor? Sonoma Pharmaceuticals currently has financial flexibility to ramp up growth in the future. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more confidence in the stock, you need to also examine SNOA’s track record. As a following step, you should take a look at SNOA’s past performance analysis on our free platform to conclude on SNOA’s financial health.

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.