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While small-cap stocks, such as InnSuites Hospitality Trust (AMEX:IHT) with its market cap of US$26.93M, 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 IHT is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into IHT here.
Does IHT generate an acceptable amount of cash through operations?
IHT has shrunken its total debt levels in the last twelve months, from US$16.38M to US$12.66M , which is made up of current and long term debt. With this reduction in debt, IHT currently has US$5.78M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of IHT’s operating efficiency ratios such as ROA here.
Does IHT’s liquid assets cover its short-term commitments?
At the current liabilities level of US$4.05M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$8.07M, leading to a 1.99x current account ratio. Generally, for Hospitality companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does IHT face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, IHT 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. However, since IHT is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
IHT’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. This is only a rough assessment of financial health, and I’m sure IHT has company-specific issues impacting its capital structure decisions. You should continue to research InnSuites Hospitality Trust to get a better picture of the stock by looking at:
Historical Performance: What has IHT’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.
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.