Investors are always looking for growth in small-cap stocks like Cyanotech Corporation (NASDAQ:CYAN), with a market cap of $23.26M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health 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. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into CYAN here.
Does CYAN generate an acceptable amount of cash through operations?
Over the past year, CYAN has maintained its debt levels at around $7.5M comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at $1.4M for investing into the business. On top of this, CYAN has generated $1.2M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 16.30%, signalling that CYAN’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CYAN’s case, it is able to generate 0.16x cash from its debt capital.
Can CYAN pay its short-term liabilities?
With current liabilities at $6.0M, the company has been able to meet these obligations given the level of current assets of $12.2M, with a current ratio of 2.03x. Usually, for Personal Products companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is CYAN’s debt level acceptable?
CYAN’s level of debt is appropriate relative to its total equity, at 39.52%. This range is considered safe as CYAN is not taking on too much debt obligation, which may be constraining for future growth. We can test if CYAN’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CYAN, the ratio of 1.98x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Although CYAN’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. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure CYAN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Cyanotech to get a more holistic view of the stock by looking at:
- 1. Valuation: What is CYAN 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 CYAN is currently mispriced by the market.
- 2. Historical Performance: What has CYAN’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.
- 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.