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Is Ocean Bio-Chem Inc’s (NASDAQ:OBCI) Balance Sheet Strong Enough To Weather A Storm?

Declan Brown

Ocean Bio-Chem Inc (NASDAQ:OBCI) is a small-cap stock with a market capitalization of US$39.1m. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into OBCI here.

How much cash does OBCI generate through its operations?

Over the past year, OBCI has ramped up its debt from US$97.3k to US$5.3m , which is made up of current and long term debt. With this rise in debt, OBCI currently has US$923.0k remaining in cash and short-term investments , ready to deploy into the business. Additionally, OBCI has produced US$1.8m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 34.6%, signalling that OBCI’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In OBCI’s case, it is able to generate 0.35x cash from its debt capital.

Can OBCI meet its short-term obligations with the cash in hand?

At the current liabilities level of US$5.3m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.74x. However, anything about 3x may be excessive, since OBCI may be leaving too much capital in low-earning investments.

NasdaqCM:OBCI Historical Debt September 6th 18

Can OBCI service its debt comfortably?

With a debt-to-equity ratio of 20.4%, OBCI’s debt level may be seen as prudent. This range is considered safe as OBCI is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether OBCI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In OBCI’s, case, the ratio of 172x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as OBCI’s high interest coverage is seen as responsible and safe practice.

Next Steps:

OBCI has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure OBCI has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ocean Bio-Chem to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for OBCI’s future growth? Take a look at our free research report of analyst consensus for OBCI’s outlook.
  2. Historical Performance: What has OBCI’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 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 editorial-team@simplywallst.com.