Wolf Minerals Limited (ASX:WLF) is a small-cap stock with a market capitalization of AU$56.65M. 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? Since WLF 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. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into WLF here.

Does WLF generate an acceptable amount of cash through operations?

WLF’s debt levels surged from AU$111.69M to AU$157.30M over the last 12 months , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$8.33M , 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. For this article’s sake, I won’t be looking at this today, but you can assess some of WLF’s operating efficiency ratios such as ROA here.

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

Looking at WLF’s most recent AU$87.25M 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 0.16x, which is below the prudent industry ratio of 3x.

Is WLF’s debt level acceptable?

With total debt exceeding equities, WLF 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. But since WLF is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

With a high level of debt on its balance sheet, WLF could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for WLF to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for WLF’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Wolf Minerals to get a better picture of the stock by looking at: