Investors are always looking for growth in small-cap stocks like Spark Energy Inc (NASDAQ:SPKE), with a market cap of $394.79M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into SPKE here.

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

SPKE’s debt levels surged from $48.7M to $78.4M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, SPKE currently has $26.8M remaining in cash and short-term investments , ready to deploy into the business. On top of this, SPKE has produced cash from operations of $67.8M in the last twelve months, leading to an operating cash to total debt ratio of 86.50%, indicating that SPKE’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SPKE’s case, it is able to generate 0.87x cash from its debt capital.

Can SPKE pay its short-term liabilities?

At the current liabilities level of $184.1M liabilities, it seems that the business has been able to meet these commitments with a current assets level of $198.0M, leading to a 1.08x current account ratio. Usually, for Electric Utilities companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

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

With a debt-to-equity ratio of 64.14%, SPKE can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SPKE’s case, the ratio of 4.57x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

SPKE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how SPKE has been performing in the past. I recommend you continue to research Spark Energy to get a more holistic view of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for SPKE’s future growth? Take a look at our free research report of analyst consensus for SPKE’s outlook.

• 2. Valuation: What is SPKE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SPKE is currently mispriced by the market.

• 3. 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.