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Strattec Security Corporation (NASDAQ:STRT) is a small-cap stock with a market capitalization of US$113m. 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? Given that STRT is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into STRT here.
How does STRT’s operating cash flow stack up against its debt?
STRT’s debt level has been constant at around US$46m over the previous year – this includes long-term debt. At this constant level of debt, STRT currently has US$11m remaining in cash and short-term investments for investing into the business. On top of this, STRT has generated cash from operations of US$26m during the same period of time, leading to an operating cash to total debt ratio of 56%, meaning that STRT’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In STRT’s case, it is able to generate 0.56x cash from its debt capital.
Can STRT meet its short-term obligations with the cash in hand?
With current liabilities at US$66m, the company has been able to meet these commitments with a current assets level of US$146m, leading to a 2.22x current account ratio. Generally, for Auto Components 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 STRT service its debt comfortably?
With debt at 25% of equity, STRT may be thought of as appropriately levered. STRT is not taking on too much debt commitment, which may be constraining for future growth. STRT’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
STRT’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for STRT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Strattec Security to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for STRT’s future growth? Take a look at our free research report of analyst consensus for STRT’s outlook.
- Valuation: What is STRT 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 STRT 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 email@example.com. 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. On rare occasion, data errors may occur. Thank you for reading.