Investors are always looking for growth in small-cap stocks like XRF Scientific Limited (ASX:XRF), with a market cap of AU$25.43M. 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into XRF here.

Does XRF generate an acceptable amount of cash through operations?

Over the past year, XRF has ramped up its debt from AU$1.11M to AU$1.25M , which comprises of short- and long-term debt. With this rise in debt, XRF currently has AU$833.41K remaining in cash and short-term investments , ready to deploy into the business. On top of this, XRF has produced AU$156.18K in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 12.46%, meaning that XRF’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In XRF’s case, it is able to generate 0.12x cash from its debt capital.

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

With current liabilities at AU$2.34M, it appears that the company has been able to meet these commitments with a current assets level of AU$10.83M, leading to a 4.62x current account ratio. Though, anything about 3x may be excessive, since XRF may be leaving too much capital in low-earning investments.

Can XRF service its debt comfortably?

With a debt-to-equity ratio of 7.72%, XRF’s debt level is relatively low. XRF is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether XRF is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In XRF’s, case, the ratio of 20.61x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as XRF’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although XRF’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. I admit this is a fairly basic analysis for XRF’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research XRF Scientific to get a more holistic view of the stock by looking at: