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While small-cap stocks, such as Peet Limited (ASX:PPC) with its market cap of AU$546m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into PPC here.

PPC’s Debt (And Cash Flows)

Over the past year, PPC has maintained its debt levels at around AU$253m – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at AU$48m to keep the business going. Moreover, PPC has produced AU$26m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 10%, indicating that PPC’s operating cash is less than its debt.

Can PPC pay its short-term liabilities?

Looking at PPC’s AU$115m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.57x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Real Estate companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Can PPC service its debt comfortably?

With debt reaching 46% of equity, PPC may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether PPC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PPC's, case, the ratio of 6.34x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although PPC’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how PPC has been performing in the past. You should continue to research Peet to get a better picture of the small-cap by looking at:

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

2. Valuation: What is PPC 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 PPC 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.