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LSB Industries, Inc. (NYSE:LXU) is a small-cap stock with a market capitalization of US$98m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that LXU is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into LXU here.
Does LXU Produce Much Cash Relative To Its Debt?
Over the past year, LXU has ramped up its debt from US$415m to US$446m – this includes long-term debt. With this increase in debt, LXU's cash and short-term investments stands at US$22m , ready to be used for running the business. On top of this, LXU has produced US$23m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 5.3%, meaning that LXU’s current level of operating cash is not high enough to cover debt.
Can LXU pay its short-term liabilities?
Looking at LXU’s US$106m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.34x. The current ratio is the number you get when you divide current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is LXU’s debt level acceptable?
LXU is a relatively highly levered company with a debt-to-equity of 81%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since LXU is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
LXU’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 LXU'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 LXU has company-specific issues impacting its capital structure decisions. You should continue to research LSB Industries to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LXU’s future growth? Take a look at our free research report of analyst consensus for LXU’s outlook.
- Valuation: What is LXU 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 LXU 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.
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 firstname.lastname@example.org. 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.