Investors are always looking for growth in small-cap stocks like Real Estate Investar Group Limited (ASX:REV), with a market cap of AUD A$4.43M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the internet software and services industry, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into REV here.

Does REV generate enough cash through operations?

REV’s debt level has been constant at around A$0M over the previous year made up of predominantly near term debt. At this current level of debt, REV’s cash and short-term investments stands at A$1M , ready to deploy into the business. Though its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of REV’s operating efficiency ratios such as ROA here.

Can REV pay its short-term liabilities?

Looking at REV’s most recent A$3M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of A$2M, with a current ratio of 0.91x below the prudent level of 3x.

Can REV service its debt comfortably?

REV’s level of debt is appropriate relative to its total equity, at 13.40%. REV is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for REV, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

Are you a shareholder? Although REV’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may be different. I suggest keeping abreast of market expectations for REV’s future growth on our free analysis platform.

Are you a potential investor? REV appears to have maintained a sensible level of debt, meaning there’s some room to take on more debt if needed. But its current cash flow coverage of existing debt, in addition to the low liquidity, is concerning. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of REV’s track record. I encourage you to continue your research by taking a look at REV’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.

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.