Investors are always looking for growth in small-cap stocks like The LS Starrett Company (NYSE:SCX), with a market cap of US$43.6m. However, an important fact which most ignore is: how financially healthy is the business? Given that SCX is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SCX here.
Does SCX produce enough cash relative to debt?
SCX has built up its total debt levels in the last twelve months, from US$17.6m to US$21.0m – this includes both the current and long-term debt. With this increase in debt, SCX’s cash and short-term investments stands at US$14.8m for investing into the business. Moreover, SCX has produced US$4.1m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 19.3%, signalling that SCX’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In SCX’s case, it is able to generate 0.19x cash from its debt capital.
Can SCX meet its short-term obligations with the cash in hand?
Looking at SCX’s most recent US$26.2m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$113.2m, leading to a 4.32x current account ratio. However, anything above 3x is considered high and could mean that SCX has too much idle capital in low-earning investments.
Can SCX service its debt comfortably?
SCX’s level of debt is appropriate relative to its total equity, at 23.9%. This range is considered safe as SCX is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for SCX, and the company also has the ability and headroom to increase debt if needed going forward.
SCX’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how SCX has been performing in the past. I suggest you continue to research L.S. Starrett to get a more holistic view of the stock by looking at:
- Valuation: What is SCX 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 SCX is currently mispriced by the market.
- Historical Performance: What has SCX’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 email@example.com.