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Investors are always looking for growth in small-cap stocks like Servotronics, Inc. (NYSEMKT:SVT), with a market cap of US$29m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SVT here.
Does SVT produce enough cash relative to debt?
SVT has built up its total debt levels in the last twelve months, from US$3.1m to US$3.3m , which includes long-term debt. With this rise in debt, SVT’s cash and short-term investments stands at US$2.4m for investing into the business. On top of this, SVT has generated cash from operations of US$2.9m during the same period of time, leading to an operating cash to total debt ratio of 88%, indicating that SVT’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SVT’s case, it is able to generate 0.88x cash from its debt capital.
Can SVT meet its short-term obligations with the cash in hand?
Looking at SVT’s US$6.1m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.64x. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is SVT’s debt level acceptable?
SVT’s level of debt is appropriate relative to its total equity, at 11%. SVT is not taking on too much debt commitment, which may be constraining for future growth. We can test if SVT’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 SVT, the ratio of 41.11x 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.
SVT’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for SVT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Servotronics to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SVT’s future growth? Take a look at our free research report of analyst consensus for SVT’s outlook.
- Historical Performance: What has SVT’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 firstname.lastname@example.org.