Latin Resources Limited (ASX:LRS) is a small-cap stock with a market capitalization of AUD A$22.48M. 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 LRS is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend dig deeper yourself into LRS here.
How does LRS’s operating cash flow stack up against its debt?
LRS’s debt levels have fallen from A$2M to A$1M over the last 12 months , which is mainly comprised of near term debt. With this reduction in debt, LRS’s cash and short-term investments stands at A$1M , ready to deploy into the business. Though its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 LRS’s operating efficiency ratios such as ROA here.
Can LRS pay its short-term liabilities?
Looking at LRS’s most recent A$1M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.14x. Usually, for metals and mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is LRS’s level of debt at an acceptable level?
With debt at 14.56% of equity, LRS may be thought of as appropriately levered. LRS is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with LRS, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Are you a shareholder? LRS’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 will be able to pay all of its upcoming liabilities from its current short-term assets. Given that LRS’s financial situation may change. I suggest keeping abreast of market expectations for LRS’s future growth on our free analysis platform.
Are you a potential investor? Latin Resources currently has financial flexibility to ramp up growth in the future. Moreover, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your conviction in the stock, you need to also analyse LRS’s track record. You should continue your analysis by taking a look at LRS’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.