While small-cap stocks, such as ERG Spólka Akcyjna (WSE:ERG) with its market cap of zł23m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that ERG is not presently profitable, it’s essential to evaluate 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 not a comprehensive overview, so I suggest you dig deeper yourself into ERG here.

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ERG’s Debt (And Cash Flows)

ERG has built up its total debt levels in the last twelve months, from zł12m to zł14m , which includes long-term debt. With this increase in debt, ERG currently has zł1.9m remaining in cash and short-term investments , ready to be used for running the business. On top of this, ERG has produced zł4.4m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 30%, meaning that ERG’s operating cash is sufficient to cover its debt.

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

Looking at ERG’s zł24m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of zł28m, with a current ratio of 1.17x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is ERG’s debt level acceptable?

ERG is a relatively highly levered company with a debt-to-equity of 42%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since ERG is presently unprofitable, there’s a question of sustainability of its current operations. 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:

Although ERG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how ERG has been performing in the past. You should continue to research ERG Spólka Akcyjna to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for ERG’s future growth? Take a look at our free research report of analyst consensus for ERG’s outlook.

2. Historical Performance: What has ERG'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.

3. 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.