Luby’s Inc (NYSE:LUB) is a small-cap stock with a market capitalization of US$78.40M. 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 LUB is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into LUB here.
Does LUB generate enough cash through operations?
LUB has shrunken its total debt levels in the last twelve months, from US$37.04M to US$31.07M – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$1.10M for investing into the business. Moreover, LUB has generated US$9.64M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 31.02%, indicating that LUB’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In LUB’s case, it is able to generate 0.31x cash from its debt capital.
Can LUB meet its short-term obligations with the cash in hand?
With current liabilities at US$44.38M, it appears that the company has not been able to meet these commitments with a current assets level of US$16.99M, leading to a 0.38x current account ratio. which is under the appropriate industry ratio of 3x.
Can LUB service its debt comfortably?
With a debt-to-equity ratio of 29.35%, LUB’s debt level may be seen as prudent. This range is considered safe as LUB is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. LUB’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
LUB’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, 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 LUB has been performing in the past. You should continue to research Luby’s to get a better picture of the stock by looking at:
- Historical Performance: What has LUB’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.
To help readers see pass 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.