Sterling Construction Company, Inc. (NASDAQ:STRL) is a small-cap stock with a market capitalization of US$321m. 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 essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into STRL here.
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STRL’s Debt (And Cash Flows)
Over the past year, STRL has ramped up its debt from US$86m to US$93m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$57m , ready to be used for running the business. On top of this, STRL has produced US$43m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 46%, indicating that STRL’s debt is appropriately covered by operating cash.
Can STRL meet its short-term obligations with the cash in hand?
At the current liabilities level of US$162m, it appears that the company has been able to meet these obligations given the level of current assets of US$269m, with a current ratio of 1.66x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Construction companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can STRL service its debt comfortably?
With a debt-to-equity ratio of 56%, STRL can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if STRL’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 STRL, the ratio of 2.46x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
STRL’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how STRL has been performing in the past. You should continue to research Sterling Construction Company to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for STRL’s future growth? Take a look at our free research report of analyst consensus for STRL’s outlook.
- Valuation: What is STRL 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 STRL 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.