Investors are always looking for growth in small-cap stocks like Landec Corporation (NASDAQ:LNDC), with a market cap of $346.58M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into LNDC here.
Does LNDC generate enough cash through operations?
Over the past year, LNDC has reduced its debt from $61.1M to $54.0M , which comprises of short- and long-term debt. With this debt repayment, LNDC currently has $5.4M remaining in cash and short-term investments for investing into the business. Additionally, LNDC has generated $29.3M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 54.27%, indicating that LNDC’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LNDC’s case, it is able to generate 0.54x cash from its debt capital.
Can LNDC meet its short-term obligations with the cash in hand?
At the current liabilities level of $51.5M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.58x. Usually, for food companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can LNDC service its debt comfortably?
With a debt-to-equity ratio of 26.05%, LNDC’s debt level may be seen as prudent. This range is considered safe as LNDC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
Are you a shareholder? LNDC 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 will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, LNDC’s financial situation may change. You should always be keeping abreast of market expectations for LNDC’s future growth on our free analysis platform.
Are you a potential investor? Although LNDC’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. Moreover, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your conviction in the stock, you need to further examine the company’s track record. I encourage you to continue your research by taking a look at LNDC’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.