Investors are always looking for growth in small-cap stocks like Optical Cable Corporation (NASDAQ:OCC), with a market cap of US$21.81M. However, an important fact which most ignore is: how financially healthy is the business? Communications companies, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into OCC here.
How does OCC’s operating cash flow stack up against its debt?
OCC’s debt level has been constant at around US$12.37M over the previous year – this includes both the current and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$891.17K for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of OCC’s operating efficiency ratios such as ROA here.
Can OCC pay its short-term liabilities?
Looking at OCC’s most recent US$4.20M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$27.10M, leading to a 6.46x current account ratio. However, a ratio greater than 3x may be considered as too high, as OCC could be holding too much capital in a low-return investment environment.
Can OCC service its debt comfortably?
With debt reaching 53.79% of equity, OCC may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since OCC is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
OCC’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for OCC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Optical Cable to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has OCC’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.
- 2. 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 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.