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Investors are always looking for growth in small-cap stocks like Industrial Services of America, Inc. (NASDAQ:IDSA), with a market cap of US$11m. However, an important fact which most ignore is: how financially healthy is the business? Since IDSA is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into IDSA here.
IDSA’s Debt (And Cash Flows)
IDSA's debt levels surged from US$7.7m to US$8.5m over the last 12 months , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$1.0m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of IDSA’s operating efficiency ratios such as ROA here.
Can IDSA pay its short-term liabilities?
Looking at IDSA’s US$7.2m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$13m, with a current ratio of 1.74x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Commercial Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is IDSA’s debt level acceptable?
With a debt-to-equity ratio of 77%, IDSA can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since IDSA is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although IDSA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 IDSA's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Industrial Services of America to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has IDSA'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.
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.