While small-cap stocks, such as Superior Drilling Products Inc (AMEX:SDPI) with its market cap of USD $24.80M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for Superior Drilling Products
Does SDPI generate enough cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can SDPI pay off what it owes to its debtholder by using only cash from its operational activities? Last year, SDPI’s operating cash flow was -0.1x its current debt. This means what SDPI can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at SDPI’s operations at this point in time.
Can SDPI meet its short-term obligations with the cash in hand?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. During times of unfavourable events, SDPI could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for SDPI’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that SDPI does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is SDPI’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. SDPI’s debt-to-equity ratio stands at 96.72%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate.
Are you a shareholder? SDPI’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 means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may change. I suggest keeping on top of market expectations for SDPI’s future growth on our free analysis platform.
Are you a potential investor? SDPI’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. I encourage you to continue your research by taking a look at SDPI’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.