Is Zeta Resources Limited's (ASX:ZER) Balance Sheet Strong Enough To Weather A Storm?
Zeta Resources Limited (ASX:ZER) is a small-cap stock with a market capitalization of AU$95m. 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? Since ZER 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. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into ZER here.
Does ZER Produce Much Cash Relative To Its Debt?
ZER has built up its total debt levels in the last twelve months, from US$24m to US$48m , which accounts for long term debt. With this rise in debt, ZER currently has US$841k remaining in cash and short-term investments to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of ZER’s operating efficiency ratios such as ROA here.
Can ZER meet its short-term obligations with the cash in hand?
With current liabilities at US$1.9m, the company may not have an easy time meeting these commitments with a current assets level of US$841k, leading to a current ratio of 0.43x. The current ratio is calculated by dividing current assets by current liabilities.
Can ZER service its debt comfortably?
With a debt-to-equity ratio of 60%, ZER can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since ZER 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 ZER’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. However, 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 ZER has been performing in the past. You should continue to research Zeta Resources to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ZER’s future growth? Take a look at our free research report of analyst consensus for ZER’s outlook.
Historical Performance: What has ZER'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.
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.
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