While small-cap stocks, such as Don’t Nod Entertainment SA. (ENXTPA:ALDNE) with its market cap of €63.12M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Software industry, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into ALDNE here.

How does ALDNE’s operating cash flow stack up against its debt?

ALDNE has sustained its debt level by about €4.96M over the last 12 months comprising of short- and long-term debt. At this constant level of debt, ALDNE currently has €692.00K remaining in cash and short-term investments for investing into the business. Additionally, ALDNE has produced €1.15M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 23.12%, indicating that ALDNE’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In ALDNE’s case, it is able to generate 0.23x cash from its debt capital.

Can ALDNE pay its short-term liabilities?

With current liabilities at €7.68M, it appears that the company has not been able to meet these commitments with a current assets level of €6.16M, leading to a 0.8x current account ratio. which is under the appropriate industry ratio of 3x.

Does ALDNE face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, ALDNE is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since ALDNE is currently 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, ALDNE 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 ALDNE to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure ALDNE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Don’t Nod Entertainment to get a more holistic view of the stock by looking at:

1. Historical Performance: What has ALDNE’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.

2. 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.