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Investors are always looking for growth in small-cap stocks like Lindsay Corporation (NYSE:LNN), with a market cap of US$926m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into LNN here.
How does LNN’s operating cash flow stack up against its debt?
Over the past year, LNN has maintained its debt levels at around US$117m including long-term debt. At this stable level of debt, LNN currently has US$137m remaining in cash and short-term investments for investing into the business. Moreover, LNN has produced cash from operations of US$25m in the last twelve months, leading to an operating cash to total debt ratio of 21%, meaning that LNN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LNN’s case, it is able to generate 0.21x cash from its debt capital.
Does LNN’s liquid assets cover its short-term commitments?
With current liabilities at US$83m, it appears that the company has been able to meet these obligations given the level of current assets of US$325m, with a current ratio of 3.92x. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Does LNN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 42%, LNN can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In LNN’s case, the ratio of 12.57x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving LNN ample headroom to grow its debt facilities.
LNN’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for LNN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Lindsay to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LNN’s future growth? Take a look at our free research report of analyst consensus for LNN’s outlook.
- Valuation: What is LNN 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 LNN is currently mispriced by the market.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.