Investors are always looking for growth in small-cap stocks like LSB Industries Inc (NYSE:LXU), with a market cap of USD $211.05M. However, an important fact which most ignore is: how financially healthy is the company? Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for LSB Industries
Does LXU generate enough cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These catastrophes does not mean the company can stop servicing its debt obligations. Can LXU pay off what it owes to its debtholder by using only cash from its operational activities? In the case of LXU, operating cash flow turned out to be -0.09x its debt level over the past twelve months. This means what LXU can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at LXU’s operations at this point in time.
Can LXU meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? As cash flow from operation is hindered by adverse events, LXU may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that LXU does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Can LXU service its debt comfortably?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For LXU, the debt-to-equity ratio is 65.92%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet.
Are you a shareholder? At its current level of cash flow coverage, LXU has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. You should always be keeping on top of market expectations for LXU’s future growth on our free analysis platform.
Are you a potential investor? Though short-term liquidity isn’t a concern, LXU’s high debt levels on top of poor cash coverage may not be what you’re after in an investment. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of LXU’s track record. I encourage you to continue your research by taking a look at LXU’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass 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.