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Investors are always looking for growth in small-cap stocks like SemiLEDs Corporation (NASDAQ:LEDS), with a market cap of US$14.64M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Semiconductor industry, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into LEDS here.
Does LEDS generate an acceptable amount of cash through operations?
LEDS’s debt levels have fallen from US$2.91M to US$2.73M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$3.58M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of LEDS’s operating efficiency ratios such as ROA here.
Can LEDS pay its short-term liabilities?
With current liabilities at US$7.46M, the company has been able to meet these obligations given the level of current assets of US$8.04M, with a current ratio of 1.08x. For Semiconductor 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.
Can LEDS service its debt comfortably?
With a debt-to-equity ratio of 35.57%, LEDS’s debt level may be seen as prudent. LEDS is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. LEDS’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Although LEDS’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for LEDS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research SemiLEDs to get a more holistic view of the stock by looking at:
1. Valuation: What is LEDS 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 LEDS is currently mispriced by the market.
2. Historical Performance: What has LEDS’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.
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.