The L.S. Starrett Company (NYSE:SCX) is a small-cap stock with a market capitalization of US$56m. 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? Understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into SCX here.
SCX’s Debt (And Cash Flows)
SCX has shrunk its total debt levels in the last twelve months, from US$22m to US$20m , which includes long-term debt. With this debt repayment, SCX’s cash and short-term investments stands at US$13m to keep the business going. Moreover, SCX has generated US$6.2m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 30%, indicating that SCX’s current level of operating cash is high enough to cover debt.
Does SCX’s liquid assets cover its short-term commitments?
Looking at SCX’s US$26m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$114m, with a current ratio of 4.36x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Does SCX face the risk of succumbing to its debt-load?
With debt at 23% of equity, SCX may be thought of as appropriately levered. This range is considered safe as SCX is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if SCX’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 SCX, the ratio of 10.99x 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.
SCX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how SCX has been performing in the past. I recommend you continue to research L.S. Starrett to get a more holistic view of the stock by looking at:
- Historical Performance: What has SCX’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.
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