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Cycliq Group Limited (ASX:CYQ) is a small-cap stock with a market capitalization of AU$1.9m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that CYQ is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into CYQ here.

CYQ’s Debt (And Cash Flows)

In the previous 12 months, CYQ's rose by about AU$510k , which is mainly comprised of near term debt. With this increase in debt, CYQ currently has AU$560k remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of CYQ’s operating efficiency ratios such as ROA here.

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

At the current liabilities level of AU$1.8m, the company has been able to meet these commitments with a current assets level of AU$2.4m, leading to a 1.36x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Leisure 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 CYQ’s debt level acceptable?

CYQ is a relatively highly levered company with a debt-to-equity of 43%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since CYQ is presently loss-making, there’s a question of sustainability of its current operations. 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:

CYQ’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. I admit this is a fairly basic analysis for CYQ's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Cycliq Group to get a better picture of the small-cap by looking at:

1. Historical Performance: What has CYQ'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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.