What does Ossen Innovation Co Ltd.’s (NASDAQ:OSN) Balance Sheet Tell Us About Its Future?
Ossen Innovation Co Ltd. (NASDAQ:OSN) is a small-cap stock with a market capitalization of US$18.93M. 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? Evaluating financial health as part of your investment thesis is vital, 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, this commentary is still very high-level, so I recommend you dig deeper yourself into OSN here.
How does OSN’s operating cash flow stack up against its debt?
Over the past year, OSN has reduced its debt from US$33.71M to US$31.85M , which is made up of current and long term debt. With this reduction in debt, OSN’s cash and short-term investments stands at US$950.23K , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of OSN’s operating efficiency ratios such as ROA here.
Can OSN pay its short-term liabilities?
At the current liabilities level of US$29.92M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$144.64M, leading to a 4.83x current account ratio. However, anything above 3x is considered high and could mean that OSN has too much idle capital in low-earning investments.
Can OSN service its debt comfortably?
With a debt-to-equity ratio of 27.71%, OSN’s debt level may be seen as prudent. OSN is not taking on too much debt commitment, which may be constraining for future growth. We can test if OSN’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For OSN, the ratio of 5.25x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving OSN ample headroom to grow its debt facilities.
Next Steps:
Although OSN’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. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure OSN has company-specific issues impacting its capital structure decisions. You should continue to research Ossen Innovation to get a more holistic view of the stock by looking at:
Historical Performance: What has OSN’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.
