Seafarms Group Limited (ASX:SFG) is a small-cap stock with a market capitalization of AU$70.18M. 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 SFG is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into SFG here.

Does SFG generate enough cash through operations?

SFG’s debt levels have fallen from AU$10.09M to AU$8.67M over the last 12 months , which is made up of current and long term debt. With this debt repayment, SFG’s cash and short-term investments stands at AU$12.06M for investing 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. 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 SFG’s operating efficiency ratios such as ROA here.

Can SFG pay its short-term liabilities?

At the current liabilities level of AU$9.76M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.83x. Usually, for Food companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

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

SFG’s level of debt is appropriate relative to its total equity, at 34.23%. SFG is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for SFG, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

Although SFG’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. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure SFG has company-specific issues impacting its capital structure decisions. I suggest you continue to research Seafarms Group to get a better picture of the stock by looking at:

• 1. Historical Performance: What has SFG’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

• 2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.