While small-cap stocks, such as Lynas Corporation Limited (ASX:LYC) with its market cap of AU$1.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes 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. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into LYC here.
How does LYC’s operating cash flow stack up against its debt?
LYC has shrunken its total debt levels in the last twelve months, from AU$493m to AU$225m , which also accounts for long term debt. With this debt payback, the current cash and short-term investment levels stands at AU$42m , ready to deploy into the business. Moreover, LYC has generated cash from operations of AU$118m in the last twelve months, leading to an operating cash to total debt ratio of 53%, indicating that LYC’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LYC’s case, it is able to generate 0.53x cash from its debt capital.
Can LYC pay its short-term liabilities?
At the current liabilities level of AU$38m, it appears that the company has been able to meet these obligations given the level of current assets of AU$109m, with a current ratio of 2.86x. Generally, for Metals and Mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is LYC’s debt level acceptable?
With a debt-to-equity ratio of 52%, LYC can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if LYC’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 LYC, the ratio of 1.81x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as LYC’s low interest coverage already puts the company at higher risk of default.
LYC’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. Since there is also no concerns around LYC’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure LYC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Lynas to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LYC’s future growth? Take a look at our free research report of analyst consensus for LYC’s outlook.
- Valuation: What is LYC 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 LYC 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.