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While small-cap stocks, such as Stericycle, Inc. (NASDAQ:SRCL) with its market cap of US$4.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that SRCL is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into SRCL here.
Does SRCL Produce Much Cash Relative To Its Debt?
SRCL has built up its total debt levels in the last twelve months, from US$2.7b to US$3.2b , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$48m , ready to be used for running the business. Moreover, SRCL has produced cash from operations of US$92m during the same period of time, resulting in an operating cash to total debt ratio of 2.9%, signalling that SRCL’s operating cash is less than its debt.
Does SRCL’s liquid assets cover its short-term commitments?
Looking at SRCL’s US$786m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$802m, with a current ratio of 1.02x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Commercial Services companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SRCL service its debt comfortably?
SRCL is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since SRCL is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although SRCL’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for SRCL's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Stericycle to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SRCL’s future growth? Take a look at our free research report of analyst consensus for SRCL’s outlook.
- Valuation: What is SRCL 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 SRCL 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.