Industrial Services of America Inc (NASDAQ:IDSA) is a small-cap stock with a market capitalization of USD $13.50M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. 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. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. See our latest analysis for IDSA
Does IDSA generate an acceptable amount of cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These catastrophes does not mean the company can stop servicing its debt obligations. Can IDSA pay off what it owes to its debtholder by using only cash from its operational activities? In the case of IDSA, operating cash flow turned out to be -0.33x its debt level over the past twelve months. This means what IDSA 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 IDSA’s operations at this point in time.
Can IDSA meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, IDSA could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for IDSA’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that IDSA does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Can IDSA service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. IDSA’s debt-to-equity ratio stands at 69.23%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level.
Are you a shareholder? IDSA’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. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. I suggest keeping on top of market expectations for IDSA’s future growth on our free analysis platform.
Are you a potential investor? Though short-term liquidity isn’t a concern, IDSA’s high debt levels along with low cash coverage of debt may not be what you’re after in an investment. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of IDSA’s track record. As a following step, you should take a look at IDSA’s past performance analysis on our free platform to conclude on IDSA’s financial health.
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.