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Lianluo Smart Limited (NASDAQ:LLIT) is a small-cap stock with a market capitalization of US$22m. 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 LLIT 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. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into LLIT here.
LLIT’s Debt (And Cash Flows)
In the previous 12 months, LLIT's rose by about US$4.2m . With this increase in debt, LLIT currently has US$1.1m 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of LLIT’s operating efficiency ratios such as ROA here.
Can LLIT pay its short-term liabilities?
At the current liabilities level of US$5.5m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.94x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Medical Equipment companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is LLIT’s debt level acceptable?
With a debt-to-equity ratio of 48%, LLIT can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since LLIT is currently 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.
Although LLIT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around LLIT's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for LLIT's financial health. Other important fundamentals need to be considered alongside. You should continue to research Lianluo Smart to get a better picture of the small-cap by looking at:
- Historical Performance: What has LLIT'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.