Investors are always looking for growth in small-cap stocks like Littelfuse, Inc. (NASDAQ:LFUS), with a market cap of US$4.2b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, 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. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into LFUS here.
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LFUS’s Debt (And Cash Flows)
LFUS's debt levels have fallen from US$754m to US$706m over the last 12 months , which includes long-term debt. With this debt payback, LFUS currently has US$477m remaining in cash and short-term investments to keep the business going. On top of this, LFUS has generated US$293m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 42%, signalling that LFUS’s current level of operating cash is high enough to cover debt.
Can LFUS pay its short-term liabilities?
Looking at LFUS’s US$270m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$1.0b, with a current ratio of 3.82x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can LFUS service its debt comfortably?
With a debt-to-equity ratio of 47%, LFUS 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. We can test if LFUS’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 LFUS, the ratio of 11.23x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although LFUS’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. Since there is also no concerns around LFUS's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for LFUS's financial health. Other important fundamentals need to be considered alongside. You should continue to research Littelfuse to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LFUS’s future growth? Take a look at our free research report of analyst consensus for LFUS’s outlook.
- Valuation: What is LFUS 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 LFUS 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.
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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.