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While small-cap stocks, such as Zicom Group Limited (ASX:ZGL) with its market cap of AU$18m, 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 ZGL is not presently profitable, it’s essential to understand 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. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ZGL here.
How does ZGL’s operating cash flow stack up against its debt?
Over the past year, ZGL has ramped up its debt from S$11m to S$19m , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at S$10m , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of ZGL’s operating efficiency ratios such as ROA here.
Does ZGL’s liquid assets cover its short-term commitments?
With current liabilities at S$41m, it seems that the business has been able to meet these obligations given the level of current assets of S$64m, with a current ratio of 1.55x. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can ZGL service its debt comfortably?
With a debt-to-equity ratio of 27%, ZGL’s debt level may be seen as prudent. This range is considered safe as ZGL is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with ZGL, and the company has plenty of headroom and ability to raise debt should it need to in the future.
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ZGL’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how ZGL has been performing in the past. You should continue to research Zicom Group to get a more holistic view of the stock by looking at: