While small-cap stocks, such as Innophos Holdings Inc (NASDAQ:IPHS) with its market cap of US$601m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into IPHS here.
Does IPHS produce enough cash relative to debt?
Over the past year, IPHS has ramped up its debt from US$295m to US$345m – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$23m , ready to deploy into the business. On top of this, IPHS has produced US$65m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 19%, meaning that IPHS’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In IPHS’s case, it is able to generate 0.19x cash from its debt capital.
Can IPHS meet its short-term obligations with the cash in hand?
At the current liabilities level of US$118m liabilities, the company has been able to meet these obligations given the level of current assets of US$336m, with a current ratio of 2.84x. For Chemicals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does IPHS face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, IPHS is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In IPHS’s case, the ratio of 4.98x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving IPHS ample headroom to grow its debt facilities.
At its current level of cash flow coverage, IPHS has room for improvement to better cushion for events which may require debt repayment. Though, 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 IPHS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Innophos Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IPHS’s future growth? Take a look at our free research report of analyst consensus for IPHS’s outlook.
- Historical Performance: What has IPHS’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.