While small-cap stocks, such as Tilt Renewables Limited (NZSE:TLT) with its market cap of NZ$650.98M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that TLT is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into TLT here.

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

TLT’s debt levels surged from AU$579.88M to AU$644.78M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, TLT’s cash and short-term investments stands at AU$45.91M , ready to deploy into the business. Additionally, TLT has produced cash from operations of AU$85.94M in the last twelve months, leading to an operating cash to total debt ratio of 13.33%, signalling that TLT’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In TLT’s case, it is able to generate 0.13x cash from its debt capital.

Can TLT pay its short-term liabilities?

At the current liabilities level of AU$55.11M liabilities, the company has been able to meet these obligations given the level of current assets of AU$79.83M, with a current ratio of 1.45x. Usually, for Renewable Energy companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can TLT service its debt comfortably?

Since total debt levels have outpaced equities, TLT is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since TLT is presently loss-making, sustainability of its current state of operations becomes a concern. 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:

TLT’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for TLT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Tilt Renewables to get a more holistic view of the stock by looking at: