Investors are always looking for growth in small-cap stocks like Takung Art Co Ltd (AMEX:TKAT), with a market cap of USD $33.57M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the internet software and services industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into TKAT here.

Does TKAT generate an acceptable amount of cash through operations?

TKAT has increased its debt level by about $7.3M over the last 12 months made up of predominantly near term debt. With this ramp up in debt, TKAT’s cash and short-term investments stands at $13.4M , ready to deploy into the business. Moreover, TKAT has generated cash from operations of $4.6M during the same period of time, leading to an operating cash to total debt ratio of 0.63x, meaning that TKAT’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TKAT’s case, it is able to generate 0.63x cash from its debt capital.

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

With current liabilities at $30.6M liabilities, it seems that the business has been able to meet these commitments with a current assets level of $45.5M, leading to a 1.49x current account ratio. Usually, for internet software and services companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

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

TKAT’s level of debt is appropriate relative to its total equity, at 37.52%. This range is considered safe as TKAT is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether TKAT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In TKAT’s, case, the ratio of 5.48x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as TKAT’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Are you a shareholder? Although TKAT’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that TKAT’s financial situation may change. You should always be keeping abreast of market expectations for TKAT’s future growth on our free analysis platform.