While small-cap stocks, such as Oliver’s Real Food Limited (ASX:OLI) with its market cap of AU$8.5m, 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 OLI is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into OLI here.
Does OLI Produce Much Cash Relative To Its Debt?
OLI has shrunk its total debt levels in the last twelve months, from AU$2.0m to AU$1.7m , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at AU$3.5m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of OLI’s operating efficiency ratios such as ROA here.
Can OLI pay its short-term liabilities?
With current liabilities at AU$7.3m, it appears that the company may not be able to easily meet these obligations given the level of current assets of AU$6.0m, with a current ratio of 0.83x. The current ratio is the number you get when you divide current assets by current liabilities.
Is OLI’s debt level acceptable?
With a debt-to-equity ratio of 11%, OLI’s debt level may be seen as prudent. OLI is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for OLI, and the company also has the ability and headroom to increase debt if needed going forward.
OLI’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially when liquidity may also be an issue. This is only a rough assessment of financial health, and I’m sure OLI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Oliver’s Real Food to get a better picture of the stock by looking at:
- Historical Performance: What has OLI’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.
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