While small-cap stocks, such as Steppe Gold Ltd (TSX:STGO) with its market cap of CA$60.52M, 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 STGO is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into STGO here.
Does STGO generate an acceptable amount of cash through operations?
STGO has increased its debt level by about CA$20.96M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, STGO currently has CA$2.96M 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. 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 STGO’s operating efficiency ratios such as ROA here.
Does STGO’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$7.13M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of CA$5.14M, leading to a 0.72x current account ratio. which is under the appropriate industry ratio of 3x.
Is STGO’s debt level acceptable?
With total debt exceeding equities, STGO is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since STGO is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
STGO’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for STGO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Steppe Gold to get a more holistic view of the stock by looking at:
- Historical Performance: What has STGO’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.