Is Poseidon Nickel Limited’s (ASX:POS) Balance Sheet A Threat To Its Future?
Poseidon Nickel Limited (ASX:POS) is a small-cap stock with a market capitalization of AU$40.72M. 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 POS 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. However, since I only look at basic financial figures, I suggest you dig deeper yourself into POS here.
Does POS generate an acceptable amount of cash through operations?
Over the past year, POS has maintained its debt levels at around AU$19.36M comprising of short- and long-term debt. At this current level of debt, POS currently has AU$1.62M 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 take a look at some of POS’s operating efficiency ratios such as ROA here.
Can POS pay its short-term liabilities?
With current liabilities at AU$4.44M, it appears that the company has not been able to meet these commitments with a current assets level of AU$1.86M, leading to a 0.42x current account ratio. which is under the appropriate industry ratio of 3x.
Does POS face the risk of succumbing to its debt-load?
POS is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since POS 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.
Next Steps:
With a high level of debt on its balance sheet, POS could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for POS to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for POS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Poseidon Nickel to get a better picture of the stock by looking at:
Historical Performance: What has POS’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.
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.
