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While small-cap stocks, such as Superior Drilling Products, Inc. (NYSEMKT:SDPI) with its market cap of US$27m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that SDPI is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into SDPI here.
Does SDPI Produce Much Cash Relative To Its Debt?
SDPI has shrunk its total debt levels in the last twelve months, from US$12m to US$10m , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$4.3m to keep the business going. Moreover, SDPI has generated US$5.1m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 49%, meaning that SDPI’s debt is appropriately covered by operating cash.
Does SDPI’s liquid assets cover its short-term commitments?
At the current liabilities level of US$6.6m, it seems that the business has been able to meet these commitments with a current assets level of US$8.7m, leading to a 1.32x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Energy Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is SDPI’s debt level acceptable?
SDPI is a relatively highly levered company with a debt-to-equity of 70%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since SDPI is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
SDPI’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. Since there is also no concerns around SDPI's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SDPI's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Superior Drilling Products to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for SDPI’s future growth? Take a look at our free research report of analyst consensus for SDPI’s outlook.
Valuation: What is SDPI 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 SDPI 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 firstname.lastname@example.org. 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.