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Is Oil-Dri Corporation of America’s (NYSE:ODC) Balance Sheet A Threat To Its Future?

James Harlett

Investors are always looking for growth in small-cap stocks like Oil-Dri Corporation of America (NYSE:ODC), with a market cap of US$312.88m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ODC here.

How does ODC’s operating cash flow stack up against its debt?

Over the past year, ODC has reduced its debt from US$15.30m to US$12.24m , which is made up of current and long term debt. With this debt payback, ODC’s cash and short-term investments stands at US$32.67m for investing into the business. Additionally, ODC has generated cash from operations of US$26.95m during the same period of time, leading to an operating cash to total debt ratio of 220.10%, indicating that ODC’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ODC’s case, it is able to generate 2.2x cash from its debt capital.

Can ODC pay its short-term liabilities?

Looking at ODC’s most recent US$32.95m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$97.02m, with a current ratio of 2.94x. For Household Products 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.

NYSE:ODC Historical Debt June 24th 18

Is ODC’s debt level acceptable?

With debt at 11.77% of equity, ODC may be thought of as appropriately levered. ODC is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if ODC’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 ODC, the ratio of 31.89x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

ODC’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how ODC has been performing in the past. I suggest you continue to research Oil-Dri of America to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ODC’s future growth? Take a look at our free research report of analyst consensus for ODC’s outlook.
  2. Valuation: What is ODC 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 ODC is currently mispriced by the market.
  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.