Investors are always looking for growth in small-cap stocks like SigmaTron International, Inc. (NASDAQ:SGMA), with a market cap of US$13m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I recommend you dig deeper yourself into SGMA here.
How much cash does SGMA generate through its operations?
Over the past year, SGMA has ramped up its debt from US$40m to US$50m – this includes long-term debt. With this growth in debt, SGMA’s cash and short-term investments stands at US$1.7m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of SGMA’s operating efficiency ratios such as ROA here.
Can SGMA meet its short-term obligations with the cash in hand?
Looking at SGMA’s US$64m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$130m, leading to a 2.04x current account ratio. Usually, for Electronic companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does SGMA face the risk of succumbing to its debt-load?
SGMA is a relatively highly levered company with a debt-to-equity of 86%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since SGMA is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
SGMA’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 SGMA’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 SGMA has company-specific issues impacting its capital structure decisions. You should continue to research SigmaTron International to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SGMA’s future growth? Take a look at our free research report of analyst consensus for SGMA’s outlook.
- Historical Performance: What has SGMA’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.
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