Stratus Properties Inc (NASDAQ:STRS) is a small-cap stock with a market capitalization of US$255.61M. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into STRS here.
How does STRS’s operating cash flow stack up against its debt?
STRS has shrunken its total debt levels in the last twelve months, from US$291.10M to US$221.47M – this includes both the current and long-term debt. With this debt payback, STRS’s cash and short-term investments stands at US$14.61M , ready to deploy into the business. Moreover, STRS has generated cash from operations of US$10.25M in the last twelve months, leading to an operating cash to total debt ratio of 4.63%, meaning that STRS’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In STRS’s case, it is able to generate 0.046x cash from its debt capital.
Can STRS meet its short-term obligations with the cash in hand?
With current liabilities at US$62.00M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.15x. Though, anything above 3x is considered high and could mean that STRS has too much idle capital in low-earning investments.
Is STRS’s debt level acceptable?
STRS is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
At its current level of cash flow coverage, STRS has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure STRS has company-specific issues impacting its capital structure decisions. You should continue to research Stratus Properties to get a better picture of the stock by looking at:
Historical Performance: What has STRS’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 pass 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.