While small-cap stocks, such as LightPath Technologies, Inc. (NASDAQ:LPTH) with its market cap of US$39m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Electronic companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into LPTH here.
How does LPTH’s operating cash flow stack up against its debt?
LPTH’s debt levels have fallen from US$11m to US$7.0m over the last 12 months – this includes long-term debt. With this reduction in debt, LPTH’s cash and short-term investments stands at US$4.5m for investing into the business. On top of this, LPTH has produced US$665k in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 9.5%, signalling that LPTH’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LPTH’s case, it is able to generate 0.095x cash from its debt capital.
Can LPTH meet its short-term obligations with the cash in hand?
At the current liabilities level of US$5.3m, the company has been able to meet these obligations given the level of current assets of US$18m, with a current ratio of 3.44x. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Does LPTH face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 20%, LPTH’s debt level may be seen as prudent. This range is considered safe as LPTH is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if LPTH’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LPTH, the ratio of 0.49x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
LPTH’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for LPTH’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research LightPath Technologies to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LPTH’s future growth? Take a look at our free research report of analyst consensus for LPTH’s outlook.
- Valuation: What is LPTH 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 LPTH 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.
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.