Investors are always looking for growth in small-cap stocks like Novonix Limited (ASX:NVX), with a market cap of A$112.45M. However, an important fact which most ignore is: how financially healthy is the business? Since NVX is loss-making right now, 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. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into NVX here.

Does NVX generate enough cash through operations?

In the previous 12 months, NVX’s rose by about A$9.2M , which is mainly comprised of near term debt. With this growth in debt, NVX’s cash and short-term investments stands at A$2.4M , ready to deploy into the business. Though 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 take a look at some of NVX’s operating efficiency ratios such as ROA here.

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

With current liabilities at A$13.9M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of A$3.1M, leading to a 0.22x current account ratio. which is under the appropriate industry ratio of 3x.

Is NVX’s level of debt at an acceptable level?

With debt reaching 45.88% of equity, NVX 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. But since NVX is presently unprofitable, 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:

Are you a shareholder? NVX’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may be different. I suggest keeping on top of market expectations for NVX’s future growth on our free analysis platform.

Are you a potential investor? NVX’s large debt ratio on top of poor cash coverage as well as low liquidity coverage of short-term expenses may not build the strongest investment case. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of NVX’s track record. As a following step, you should take a look at NVX’s past performance analysis on our free platform to conclude on NVX’s financial health.

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.