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Cyanotech Corporation (NASDAQ:CYAN) is a small-cap stock with a market capitalization of US$16m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that CYAN is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into CYAN here.
CYAN’s Debt (And Cash Flows)
Over the past year, CYAN has ramped up its debt from US$6.9m to US$8.1m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$840k , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of CYAN’s operating efficiency ratios such as ROA here.
Can CYAN pay its short-term liabilities?
With current liabilities at US$9.5m, it appears that the company has been able to meet these obligations given the level of current assets of US$15m, with a current ratio of 1.54x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Personal Products 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.
Is CYAN’s debt level acceptable?
CYAN is a relatively highly levered company with a debt-to-equity of 54%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since CYAN is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
CYAN’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 CYAN has been performing in the past. I recommend you continue to research Cyanotech to get a more holistic view of the small-cap by looking at:
- 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.
- 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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.