Investors are always looking for growth in small-cap stocks like Polar Power Inc (NASDAQ:POLA), with a market cap of USD $51.22M. However, an important fact which most ignore is: how financially healthy is the company? Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for Polar Power
Does POLA generate an acceptable amount of cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, POLA’s operating cash flow was -1.92x its current debt. This means what POLA can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at POLA’s operations at this point in time.
Does POLA’s liquid assets cover its short-term commitments?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. During times of unfavourable events, POLA could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that POLA does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Can POLA service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For POLA, the debt-to-equity ratio is 1.12%, which means debt is low and does not pose any significant threat to the company’s operations. While debt-to-equity ratio has several factors at play, an easier way to check whether POLA’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. POLA’s profits amply covers interest at 88.89 times, which is seen as relatively safe. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Are you a shareholder? Although POLA’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that POLA’s financial situation may change. I suggest researching market expectations for POLA’s future growth on our free analysis platform.
Are you a potential investor? Polar Power currently has financial flexibility to ramp up growth in the future. Moreover, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your conviction in the stock, you need to also analyse the company’s track record. I encourage you to continue your research by taking a look at POLA’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.