Investors are always looking for growth in small-cap stocks like Sunworks Inc (NASDAQ:SUNW), with a market cap of US$9.9m. However, an important fact which most ignore is: how financially healthy is the business? Given that SUNW is not presently profitable, it’s crucial 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. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SUNW here.
How much cash does SUNW generate through its operations?
Over the past year, SUNW has ramped up its debt from US$2.2m to US$5.1m – this includes long-term debt. With this growth in debt, SUNW currently has US$3.6m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of SUNW’s operating efficiency ratios such as ROA here.
Does SUNW’s liquid assets cover its short-term commitments?
Looking at SUNW’s US$19m in current 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 1.19x. For Electrical companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can SUNW service its debt comfortably?
With a debt-to-equity ratio of 43%, SUNW can be considered as an above-average 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 SUNW is presently 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.
Although SUNW’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 SUNW’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SUNW’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Sunworks to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SUNW’s future growth? Take a look at our free research report of analyst consensus for SUNW’s outlook.
- Valuation: What is SUNW worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SUNW is currently mispriced by the market.
- 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 past 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. For errors that warrant correction please contact the editor at email@example.com.