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Is Lumber Liquidators Holdings, Inc.'s (NYSE:LL) Balance Sheet A Threat To Its Future?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Lumber Liquidators Holdings, Inc. (NYSE:LL), with a market cap of US$301m. However, an important fact which most ignore is: how financially healthy is the business? Given that LL is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into LL here.

Does LL Produce Much Cash Relative To Its Debt?

LL has built up its total debt levels in the last twelve months, from US$26m to US$186m , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$17m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of LL’s operating efficiency ratios such as ROA here.

Can LL meet its short-term obligations with the cash in hand?

With current liabilities at US$264m, it seems that the business has been able to meet these obligations given the level of current assets of US$357m, with a current ratio of 1.35x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Specialty Retail companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:LL Historical Debt, June 14th 2019

Can LL service its debt comfortably?

LL is a relatively highly levered company with a debt-to-equity of 47%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since LL is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

LL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for LL's financial health. Other important fundamentals need to be considered alongside. You should continue to research Lumber Liquidators Holdings to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for LL’s future growth? Take a look at our free research report of analyst consensus for LL’s outlook.
  2. Valuation: What is LL 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 LL is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com. 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.