SeaDragon Limited (NZSE:SEA) is a small-cap stock with a market capitalization of NZD NZ$27.08M. 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. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for SeaDragon

How does SEA’s operating cash flow stack up against its debt?

While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These adverse events bring devastation and yet does not absolve the company from its debt. 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, SEA’s operating cash flow was -2.72x its current debt. This means what SEA 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 SEA’s operations at this point in time.

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

What about its commitments to other stakeholders such as payments to suppliers and employees? As cash flow from operation is hindered by adverse events, SEA may need to liquidate its short-term assets to meet these upcoming payments. We test for SEA’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that SEA does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

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

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. In the case of SEA, the debt-to-equity ratio is 8.54%, which indicates that the company faces low risk associated with debt.

Next Steps:

Are you a shareholder? SEA’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. You should always be keeping abreast of market expectations for SEA’s future growth on our free analysis platform.

Are you a potential investor? SEA’s low-debt position gives it headroom for future growth funding in the future. In addition, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more conviction in the stock, you need to further examine SEA’s track record. You should continue your analysis by taking a look at SEA’s past performance analysis on our free platform to figure out SEA’s financial health position.

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.