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SIFCO Industries, Inc. (NYSEMKT:SIF) is a small-cap stock with a market capitalization of US$17m. 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? Since SIF is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into SIF here.
Does SIF Produce Much Cash Relative To Its Debt?
SIF's debt levels have fallen from US$28m to US$26m over the last 12 months , which includes long-term debt. With this debt payback, SIF currently has US$1.9m remaining in cash and short-term investments , ready to be used for running the business. Additionally, SIF has produced cash from operations of US$4.9m during the same period of time, resulting in an operating cash to total debt ratio of 19%, signalling that SIF’s current level of operating cash is not high enough to cover debt.
Can SIF meet its short-term obligations with the cash in hand?
Looking at SIF’s US$43m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.06x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Aerospace & Defense companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is SIF’s debt level acceptable?
With debt reaching 58% of equity, SIF 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. However, since SIF is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although SIF’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how SIF has been performing in the past. I recommend you continue to research SIFCO Industries to get a more holistic view of the small-cap by looking at:
- Valuation: What is SIF 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 SIF is currently mispriced by the market.
- Historical Performance: What has SIF'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.
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 firstname.lastname@example.org. 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. Thank you for reading.