Sensient Technologies Corporation (NYSE:SXT) is a small-cap stock with a market capitalization of US$2.9b. 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? Understanding the company's financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into SXT here.
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SXT’s Debt (And Cash Flows)
Over the past year, SXT has maintained its debt levels at around US$730m – this includes long-term debt. At this stable level of debt, SXT's cash and short-term investments stands at US$34m to keep the business going. Additionally, SXT has produced cash from operations of US$126m during the same period of time, resulting in an operating cash to total debt ratio of 17%, indicating that SXT’s debt is not covered by operating cash.
Can SXT pay its short-term liabilities?
Looking at SXT’s US$197m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$826m, with a current ratio of 4.18x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is SXT’s debt level acceptable?
With a debt-to-equity ratio of 83%, SXT 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SXT's case, the ratio of 9.08x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as SXT’s high interest coverage is seen as responsible and safe practice.
SXT’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 SXT's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure SXT has company-specific issues impacting its capital structure decisions. I suggest you continue to research Sensient Technologies to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SXT’s future growth? Take a look at our free research report of analyst consensus for SXT’s outlook.
- Valuation: What is SXT 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 SXT is currently mispriced by the market.
- 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.
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