Is Ossen Innovation Co Ltd. (NASDAQ:OSN) A Financially Sound Company?
Ossen Innovation Co Ltd. (NASDAQ:OSN) is a small-cap stock with a market capitalization of US$16.69M. 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? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into OSN here.
Does OSN generate an acceptable amount of cash through operations?
OSN’s debt levels have fallen from US$45.47M to US$33.71M over the last 12 months – this includes both the current and long-term debt. With this debt repayment, OSN currently has US$217.63K remaining in cash and short-term investments for investing into the business. On top of this, OSN has generated US$15.53M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 46.07%, meaning that OSN’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In OSN’s case, it is able to generate 0.46x cash from its debt capital.
Does OSN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$30.79M liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$132.43M, leading to a 4.3x current account ratio. Though, anything about 3x may be excessive, since OSN may be leaving too much capital in low-earning investments.
Can OSN service its debt comfortably?
With a debt-to-equity ratio of 28.25%, OSN’s debt level may be seen as prudent. OSN is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether OSN 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 OSN’s, case, the ratio of 4.92x suggests that interest is appropriately 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:
OSN’s high cash coverage and appropriate 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. This is only a rough assessment of financial health, and I’m sure OSN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Ossen Innovation to get a more holistic view of the stock by looking at:
1. Valuation: What is OSN 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 OSN is currently mispriced by the market.
2. Historical Performance: What has OSN’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.
