Investors are always looking for growth in small-cap stocks like Laserbond Limited (ASX:LBL), with a market cap of AU$15.4m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to 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. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into LBL here.
Does LBL produce enough cash relative to debt?
Over the past year, LBL has ramped up its debt from AU$1.4m to AU$1.9m made up of predominantly near term debt. With this increase in debt, LBL currently has AU$1.4m remaining in cash and short-term investments , ready to deploy into the business. On top of this, LBL has produced AU$386.8k in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 20.1%, signalling that LBL’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LBL’s case, it is able to generate 0.2x cash from its debt capital.
Does LBL’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$3.3m liabilities, the company has been able to meet these commitments with a current assets level of AU$9.2m, leading to a 2.77x current account ratio. For Machinery companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is LBL’s debt level acceptable?
LBL’s level of debt is appropriate relative to its total equity, at 24.7%. LBL is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether LBL 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 LBL’s, case, the ratio of 8.18x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as LBL’s high interest coverage is seen as responsible and safe practice.
Although LBL’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 will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how LBL has been performing in the past. I suggest you continue to research Laserbond to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LBL’s future growth? Take a look at our free research report of analyst consensus for LBL’s outlook.
- Historical Performance: What has LBL’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 past 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. For errors that warrant correction please contact the editor at email@example.com.