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Investors are always looking for growth in small-cap stocks like Lands' End, Inc. (NASDAQ:LE), with a market cap of US$512m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes vital, 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 recommend you dig deeper yourself into LE here.
LE’s Debt (And Cash Flows)
Over the past year, LE has maintained its debt levels at around US$482m – this includes long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$193m to keep the business going. On top of this, LE has produced US$48m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 10.0%, meaning that LE’s debt is not covered by operating cash.
Can LE pay its short-term liabilities?
Looking at LE’s US$241m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.44x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Online Retail 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.
Does LE face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, LE is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In LE's case, the ratio of 1.47x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
LE’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 LE's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for LE's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Lands' End to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LE’s future growth? Take a look at our free research report of analyst consensus for LE’s outlook.
- Historical Performance: What has LE'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 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.