Investors are always looking for growth in small-cap stocks like Landec Corporation (NASDAQ:LNDC), with a market cap of US$384m. 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into LNDC here.
Does LNDC produce enough cash relative to debt?
LNDC’s debt levels surged from US$60m to US$84m over the last 12 months , which accounts for long term debt. With this growth in debt, LNDC currently has US$1.4m remaining in cash and short-term investments , ready to deploy into the business. Moreover, LNDC has generated cash from operations of US$19m during the same period of time, leading to an operating cash to total debt ratio of 22%, signalling that LNDC’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LNDC’s case, it is able to generate 0.22x cash from its debt capital.
Can LNDC pay its short-term liabilities?
With current liabilities at US$87m, it appears that the company has been able to meet these commitments with a current assets level of US$88m, leading to a 1.02x current account ratio. For Food companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does LNDC face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 33%, LNDC’s debt level may be seen as prudent. LNDC is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether LNDC 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 LNDC’s, case, the ratio of 38.12x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as LNDC’s high interest coverage is seen as responsible and safe practice.
LNDC’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how LNDC has been performing in the past. I suggest you continue to research Landec to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LNDC’s future growth? Take a look at our free research report of analyst consensus for LNDC’s outlook.
- Historical Performance: What has LNDC’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.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.