Investors are always looking for growth in small-cap stocks like Optibase Ltd (NASDAQ:OBAS), with a market cap of $44.06M. However, an important fact which most ignore is: how financially healthy is the business? Given that OBAS is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into OBAS here.
How does OBAS’s operating cash flow stack up against its debt?
Over the past year, OBAS has reduced its debt from $167.8M to $156.3M – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at $16.0M for investing into the business. Additionally, OBAS has produced $7.3M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 0.05x, signalling that OBAS’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In OBAS’s case, it is able to generate 0.05x cash from its debt capital.
Does OBAS’s liquid assets cover its short-term commitments?
With current liabilities at $16.7M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of $16.8M, with a current ratio of 1.01x. Generally, for real estate companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does OBAS face the risk of succumbing to its debt-load?
With total debt exceeding equities, OBAS is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since OBAS is currently 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.
Are you a shareholder? OBAS’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that OBAS’s financial situation may change. I suggest keeping on top of market expectations for OBAS’s future growth on our free analysis platform.
Are you a potential investor? OBAS’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. You should continue your analysis by taking a look at OBAS’s past performance analysis on our free platform to conclude on OBAS’s financial health.
To help readers see pass 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.