While small-cap stocks, such as Sypris Solutions, Inc. (NASDAQ:SYPR) with its market cap of US$20m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since SYPR is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into SYPR here.

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SYPR’s Debt (And Cash Flows)

SYPR's debt levels have fallen from US$11m to US$9.8m over the last 12 months – this includes long-term debt. With this debt repayment, SYPR's cash and short-term investments stands at US$11m to keep the business going. On top of this, SYPR has produced US$1.9m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 19%, meaning that SYPR’s debt is not covered by operating cash.

Can SYPR pay its short-term liabilities?

Looking at SYPR’s US$29m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$45m, with a current ratio of 1.57x. The current ratio is calculated by dividing current assets by current liabilities. For Auto Components companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does SYPR face the risk of succumbing to its debt-load?

SYPR is a relatively highly levered company with a debt-to-equity of 66%. 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 SYPR 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:

SYPR’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. Since there is also no concerns around SYPR's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure SYPR has company-specific issues impacting its capital structure decisions. You should continue to research Sypris Solutions to get a better picture of the small-cap by looking at:

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

2. Valuation: What is SYPR 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 SYPR 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.