Investors are always looking for growth in small-cap stocks like Superior Drilling Products Inc (NYSEMKT:SDPI), with a market cap of US$87m. However, an important fact which most ignore is: how financially healthy is the business? Energy Services companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into SDPI here.
How much cash does SDPI generate through its operations?
Over the past year, SDPI has reduced its debt from US$14m to US$12m , which is made up of current and long term debt. With this debt repayment, SDPI’s cash and short-term investments stands at US$3m for investing into the business. On top of this, SDPI has produced cash from operations of US$5m over the same time period, leading to an operating cash to total debt ratio of 41%, meaning that SDPI’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SDPI’s case, it is able to generate 0.41x cash from its debt capital.
Can SDPI meet its short-term obligations with the cash in hand?
At the current liabilities level of US$9m liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$8m, leading to a current ratio of 0.85x.
Is SDPI’s debt level acceptable?
SDPI is a relatively highly levered company with a debt-to-equity of 74%. 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 SDPI’s case, the ratio of 3.03x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SDPI’s high interest coverage is seen as responsible and safe practice.
Although SDPI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how SDPI has been performing in the past. You should continue to research Superior Drilling Products to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SDPI’s future growth? Take a look at our free research report of analyst consensus for SDPI’s outlook.
- Valuation: What is SDPI 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 SDPI 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.
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.
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