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Investors are always looking for growth in small-cap stocks like Spark Networks SE (NYSEMKT:LOV), with a market cap of US$147m. However, an important fact which most ignore is: how financially healthy is the business? Since LOV is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into LOV here.
How much cash does LOV generate through its operations?
Over the past year, LOV has reduced its debt from €32m to €14m , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at €10m , 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 LOV’s operating efficiency ratios such as ROA here.
Does LOV’s liquid assets cover its short-term commitments?
Looking at LOV’s €39m in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.56x.
Is LOV’s debt level acceptable?
With debt reaching 66% of equity, LOV 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 LOV is presently unprofitable, 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 LOV’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for LOV’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Spark Networks to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LOV’s future growth? Take a look at our free research report of analyst consensus for LOV’s outlook.
- Historical Performance: What has LOV’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 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 firstname.lastname@example.org.