Investors are always looking for growth in small-cap stocks like Stratus Properties Inc (NASDAQ:STRS), with a market cap of $237.50M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into STRS here.
Does STRS generate an acceptable amount of cash through operations?
STRS’s debt levels surged from $260.6M to $291.1M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, STRS’s cash and short-term investments stands at $13.6M for investing into the business. Though its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 STRS’s operating efficiency ratios such as ROA here.
Does STRS’s liquid assets cover its short-term commitments?
At the current liabilities level of $66.5M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $177.3M, leading to a 2.66x current account ratio. For real estate companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is STRS’s level of debt at an acceptable level?
Since total debt levels have outpaced equities, STRS 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In STRS’s case, the ratio of 0.17x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Are you a shareholder? STRS’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may be different. I recommend keeping abreast of market expectations for STRS’s future growth on our free analysis platform.
Are you a potential investor? STRS’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. As a following step, you should take a look at STRS’s past performance analysis on our free platform to conclude on STRS’s financial health.
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.