While small-cap stocks, such as Dealnet Capital Corp (TSXV:DLS) with its market cap of CA$29.53M, 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 IT 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 crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into DLS here.

Does DLS generate enough cash through operations?

DLS’s debt levels surged from CA$3.94M to CA$145.50M over the last 12 months , which is made up of current and long term debt. With this increase in debt, DLS’s cash and short-term investments stands at CA$17.08M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of DLS’s operating efficiency ratios such as ROA here.

Can DLS meet its short-term obligations with the cash in hand?

Looking at DLS’s most recent CA$11.78M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CA$172.16M, with a current ratio of 14.61x. Though, a ratio greater than 3x may be considered as too high, as DLS could be holding too much capital in a low-return investment environment.

Is DLS’s debt level acceptable?

With total debt exceeding equities, DLS is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since DLS is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

DLS’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how DLS has been performing in the past. I recommend you continue to research Dealnet Capital to get a more holistic view of the stock by looking at:

• 1. Historical Performance: What has DLS’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.