YPB Group Limited (ASX:YPB) is a small-cap stock with a market capitalization of AU$13.12M. 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? Given that YPB is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into YPB here.
Does YPB generate an acceptable amount of cash through operations?
YPB has shrunken its total debt levels in the last twelve months, from AU$3.02M to AU$2.84M , which is made up of current and long term debt. With this reduction in debt, YPB’s cash and short-term investments stands at AU$845.00K , 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 YPB’s operating efficiency ratios such as ROA here.
Does YPB’s liquid assets cover its short-term commitments?
Looking at YPB’s most recent AU$9.86M liabilities, the company has not been able to meet these commitments with a current assets level of AU$1.69M, leading to a 0.17x current account ratio. which is under the appropriate industry ratio of 3x.
Does YPB face the risk of succumbing to its debt-load?
With total debt exceeding equities, YPB is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since YPB is currently loss-making, 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:
YPB’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and 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 YPB’s financial health. Other important fundamentals need to be considered alongside. You should continue to research YPB Group to get a more holistic view of the stock by looking at: