While small-cap stocks, such as Quality & Reliability A.B.E.E (ATH:QUAL) with its market cap of €5.9m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. IT companies, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into QUAL here.
How does QUAL’s operating cash flow stack up against its debt?
QUAL’s debt levels have fallen from €2.6m to €2.4m over the last 12 months , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at €1.0m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of QUAL’s operating efficiency ratios such as ROA here.
Can QUAL meet its short-term obligations with the cash in hand?
Looking at QUAL’s €2.6m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €5.0m, with a current ratio of 1.93x. For IT companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is QUAL’s debt level acceptable?
With debt reaching 52% of equity, QUAL may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since QUAL is presently loss-making, 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.
QUAL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how QUAL has been performing in the past. I suggest you continue to research Quality & ReliabilityE.E to get a better picture of the small-cap by looking at:
- Valuation: What is QUAL 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 QUAL is currently mispriced by the market.
- Historical Performance: What has QUAL’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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