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Investors are always looking for growth in small-cap stocks like GlobalData Plc (LON:DATA), with a market cap of UK£897m. However, an important fact which most ignore is: how financially healthy is the business? Given that DATA is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into DATA here.

DATA’s Debt (And Cash Flows)

DATA's debt levels surged from UK£46m to UK£70m over the last 12 months – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at UK£6.3m to keep the business going. On top of this, DATA has produced UK£20m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 28%, signalling that DATA’s operating cash is sufficient to cover its debt.

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

Looking at DATA’s UK£106m in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of UK£58m, with a current ratio of 0.55x. The current ratio is the number you get when you divide current assets by current liabilities.

Is DATA’s debt level acceptable?

With debt reaching 47% of equity, DATA may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since DATA is currently 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 DATA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how DATA has been performing in the past. You should continue to research GlobalData to get a more holistic view of the stock by looking at:

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

2. Valuation: What is DATA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DATA is currently mispriced by the market.

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.