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While small-cap stocks, such as Reed's, Inc. (NASDAQ:REED) with its market cap of US$122m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since REED is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into REED here.
REED’s Debt (And Cash Flows)
REED has shrunk its total debt levels in the last twelve months, from US$12m to US$7.9m , which includes long-term debt. With this reduction in debt, REED currently has US$2.7m remaining in cash and short-term investments to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of REED’s operating efficiency ratios such as ROA here.
Does REED’s liquid assets cover its short-term commitments?
Looking at REED’s US$8.2m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.11x. The current ratio is the number you get when you divide current assets by current liabilities. For Beverage companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can REED service its debt comfortably?
With total debt exceeding equity, REED is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since REED is presently loss-making, 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.
REED’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. Since there is also no concerns around REED's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for REED's financial health. Other important fundamentals need to be considered alongside. You should continue to research Reed's to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for REED’s future growth? Take a look at our free research report of analyst consensus for REED’s outlook.
- Historical Performance: What has REED'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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.