While small-cap stocks, such as Wiit S.p.A. (BIT:WIIT) with its market cap of €123m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. 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 WIIT here.

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WIIT’s Debt (And Cash Flows)

WIIT's debt levels surged from €14m to €23m over the last 12 months , which accounts for long term debt. With this growth in debt, WIIT's cash and short-term investments stands at €18m to keep the business going. Additionally, WIIT has produced €10m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 45%, signalling that WIIT’s current level of operating cash is high enough to cover debt.

Can WIIT pay its short-term liabilities?

Looking at WIIT’s €16m in current liabilities, the company has been able to meet these obligations given the level of current assets of €26m, with a current ratio of 1.63x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

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

With total debt exceeding equity, WIIT is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if WIIT’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For WIIT, the ratio of 24.08x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as WIIT’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although WIIT’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. Since there is also no concerns around WIIT's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for WIIT's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Wiit to get a better picture of the small-cap by looking at:

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

2. Valuation: What is WIIT 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 WIIT 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.