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Investors are always looking for growth in small-cap stocks like Otter Tail Corporation (NASDAQ:OTTR), with a market cap of US$2.1b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into OTTR here.
Does OTTR Produce Much Cash Relative To Its Debt?
Over the past year, OTTR has ramped up its debt from US$620m to US$655m – this includes long-term debt. With this increase in debt, OTTR currently has US$891k remaining in cash and short-term investments to keep the business going. On top of this, OTTR has produced US$156m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 24%, signalling that OTTR’s operating cash is sufficient to cover its debt.
Can OTTR meet its short-term obligations with the cash in hand?
With current liabilities at US$201m, the company has been able to meet these commitments with a current assets level of US$274m, leading to a 1.36x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Electric Utilities companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does OTTR face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 86%, OTTR can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if OTTR’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 OTTR, the ratio of 4.09x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as OTTR’s high interest coverage is seen as responsible and safe practice.
OTTR’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 OTTR's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for OTTR's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Otter Tail to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OTTR’s future growth? Take a look at our free research report of analyst consensus for OTTR’s outlook.
- Valuation: What is OTTR 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 OTTR 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 email@example.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.