Investors are always looking for growth in small-cap stocks like STRATTEC Security Corporation (NASDAQ:STRT), with a market cap of US$134.5m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into STRT here.
How much cash does STRT generate through its operations?
STRT has built up its total debt levels in the last twelve months, from US$30.0m to US$51.0m – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$8.1m , ready to deploy into the business. Additionally, STRT has generated cash from operations of US$6.9m during the same period of time, resulting in an operating cash to total debt ratio of 13.6%, indicating that STRT’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In STRT’s case, it is able to generate 0.14x cash from its debt capital.
Does STRT’s liquid assets cover its short-term commitments?
With current liabilities at US$68.8m, it appears that the company has been able to meet these obligations given the level of current assets of US$151.1m, with a current ratio of 2.2x. Generally, for Auto Components companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can STRT service its debt comfortably?
STRT’s level of debt is appropriate relative to its total equity, at 27.8%. This range is considered safe as STRT is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if STRT’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 STRT, the ratio of 11.76x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as STRT’s high interest coverage is seen as responsible and safe practice.
STRT’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for STRT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research STRATTEC Security to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for STRT’s future growth? Take a look at our free research report of analyst consensus for STRT’s outlook.
- Historical Performance: What has STRT’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.
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 email@example.com.