U.S. Markets closed

Is ScanSource Inc (NASDAQ:SCSC) A Financially Sound Company?

ScanSource Inc (NASDAQ:SCSC) is a small-cap stock with a market capitalization of US$1.0b. 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? Electronic companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into SCSC here.

Does SCSC produce enough cash relative to debt?

SCSC has sustained its debt level by about US$282m over the last 12 months – this includes long-term debt. At this stable level of debt, SCSC currently has US$19m remaining in cash and short-term investments , ready to deploy into the business. Additionally, SCSC has generated cash from operations of US$71m during the same period of time, leading to an operating cash to total debt ratio of 25%, signalling that SCSC’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 SCSC’s case, it is able to generate 0.25x cash from its debt capital.

Does SCSC’s liquid assets cover its short-term commitments?

Looking at SCSC’s US$776m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.4b, with a current ratio of 1.85x. Generally, for Electronic companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

NasdaqGS:SCSC Historical Debt December 5th 18

Is SCSC’s debt level acceptable?

With debt at 32% of equity, SCSC may be thought of as appropriately levered. SCSC is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if SCSC’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 SCSC, the ratio of 15.23x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SCSC ample headroom to grow its debt facilities.

Next Steps:

SCSC’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, 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 SCSC has been performing in the past. I suggest you continue to research ScanSource to get a more holistic view of the stock by looking at:

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