Optical Cable Corporation (NASDAQ:OCC): Time For A Financial Health Check
Optical Cable Corporation (NASDAQ:OCC) is a small-cap stock with a market capitalization of US$35m. 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? Given that OCC is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into OCC here.
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Does OCC Produce Much Cash Relative To Its Debt?
OCC's debt levels have fallen from US$13m to US$11m over the last 12 months , which also accounts for long term debt. With this debt repayment, OCC currently has US$418k remaining in cash and short-term investments to keep the business going. Moreover, OCC has produced US$2.4m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 21%, signalling that OCC’s operating cash is sufficient to cover its debt.
Can OCC pay its short-term liabilities?
With current liabilities at US$7.7m, the company has been able to meet these commitments with a current assets level of US$30m, leading to a 3.93x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high.
Can OCC service its debt comfortably?
With a debt-to-equity ratio of 47%, OCC can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since OCC is presently loss-making, 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.
Next Steps:
OCC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around OCC's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how OCC has been performing in the past. I recommend you continue to research Optical Cable to get a better picture of the small-cap by looking at:
Valuation: What is OCC 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 OCC is currently mispriced by the market.
Historical Performance: What has OCC'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.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
