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Is Shiloh Industries Inc’s (NASDAQ:SHLO) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Shiloh Industries Inc (NASDAQ:SHLO), with a market cap of US$181m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into SHLO here.

How does SHLO’s operating cash flow stack up against its debt?

SHLO has built up its total debt levels in the last twelve months, from US$181m to US$238m , which includes long-term debt. With this increase in debt, SHLO’s cash and short-term investments stands at US$17m for investing into the business. Additionally, SHLO has produced US$58m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 24%, signalling that SHLO’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SHLO’s case, it is able to generate 0.24x cash from its debt capital.

Can SHLO pay its short-term liabilities?

With current liabilities at US$240m, it seems that the business has been able to meet these commitments with a current assets level of US$341m, leading to a 1.42x current account ratio. Usually, for Auto Components companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

NasdaqGS:SHLO Historical Debt December 10th 18

Is SHLO’s debt level acceptable?

Since total debt levels have outpaced equities, SHLO 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. We can check to see whether SHLO 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 SHLO’s, case, the ratio of 2.98x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SHLO’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Although SHLO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for SHLO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Shiloh Industries to get a more holistic view of the small-cap by looking at:

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