What You Should Know About Luxfer Holdings PLC's (NYSE:LXFR) Financial Strength
Luxfer Holdings PLC (NYSE:LXFR) is a small-cap stock with a market capitalization of US$578m. 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into LXFR here.
Does LXFR Produce Much Cash Relative To Its Debt?
Over the past year, LXFR has maintained its debt levels at around US$110m including long-term debt. At this stable level of debt, LXFR currently has US$14m remaining in cash and short-term investments to keep the business going. Additionally, LXFR has generated cash from operations of US$47m over the same time period, leading to an operating cash to total debt ratio of 43%, signalling that LXFR’s debt is appropriately covered by operating cash.
Can LXFR meet its short-term obligations with the cash in hand?
With current liabilities at US$102m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.92x. The current ratio is calculated by dividing current assets by current liabilities. For Machinery 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.
Can LXFR service its debt comfortably?
With debt reaching 52% of equity, LXFR may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether LXFR is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In LXFR's, case, the ratio of 13.79x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as LXFR’s high interest coverage is seen as responsible and safe practice.
Next Steps:
LXFR’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around LXFR's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure LXFR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Luxfer Holdings to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for LXFR’s future growth? Take a look at our free research report of analyst consensus for LXFR’s outlook.
Valuation: What is LXFR 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 LXFR 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.
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