Investors are always looking for growth in small-cap stocks like OMNOVA Solutions Inc (NYSE:OMN), with a market cap of US$477.22M. However, an important fact which most ignore is: how financially healthy is the business? Since OMN is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into OMN here.
Does OMN generate enough cash through operations?
Over the past year, OMN has maintained its debt levels at around US$354.00M – this includes both the current and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$88.00M for investing into the business. Moreover, OMN has produced cash from operations of US$47.80M in the last twelve months, resulting in an operating cash to total debt ratio of 13.50%, signalling that OMN’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In OMN’s case, it is able to generate 0.14x cash from its debt capital.
Does OMN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$116.60M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.37x. Usually, for Chemicals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can OMN service its debt comfortably?
Since total debt levels have outpaced equities, OMN is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since OMN is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
OMN’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how OMN has been performing in the past. I recommend you continue to research OMNOVA Solutions to get a more holistic view of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for OMN’s future growth? Take a look at our free research report of analyst consensus for OMN’s outlook.
- 2. Valuation: What is OMN 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 OMN 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.