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While small-cap stocks, such as Olympic Steel, Inc. (NASDAQ:ZEUS) with its market cap of US$179m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into ZEUS here.
Does ZEUS Produce Much Cash Relative To Its Debt?
Over the past year, ZEUS has ramped up its debt from US$249m to US$343m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$5.1m 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 take a look at some of ZEUS’s operating efficiency ratios such as ROA here.
Does ZEUS’s liquid assets cover its short-term commitments?
At the current liabilities level of US$130m, it seems that the business has been able to meet these commitments with a current assets level of US$562m, leading to a 4.34x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can ZEUS service its debt comfortably?
Since total debt levels exceed equity, ZEUS is a highly leveraged company. 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 ZEUS 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 ZEUS's, case, the ratio of 4.25x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as ZEUS’s high interest coverage is seen as responsible and safe practice.
ZEUS’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. This is only a rough assessment of financial health, and I'm sure ZEUS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Olympic Steel to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZEUS’s future growth? Take a look at our free research report of analyst consensus for ZEUS’s outlook.
- Valuation: What is ZEUS 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 ZEUS 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.
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 email@example.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.