Landec Corporation (NASDAQ:LNDC) is a small-cap-stock with a market capitalization of USD $375 Million. 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? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt.
Apart from geopolitical events such as political unrest and natural calamities, a company which is suddenly facing a hostile market environment must be able to fulfil short-term commitments with its reserves so that it can see another day. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Landec
Does LNDC generate enough cash through operations to meet all its needs?
While in short-term operating cash flows can be volatile, on an annual basis, they reflect the true picture of a company’s earnings quality and its ability to meet obligations . For Landec the ratio of operating cash flow to overall debt stands at 53.6%. That means Landec’s core operations are generating enough cash to comfortably service its debt.
Does LNDC’s cash and short-term assets cover its short-term commitments?
This is to test Landec’s liquidity, which it may need due to a plethora of reasons that can derail the normal functioning of an organization in the short-term. It can be anything from natural calamity, political unrest, economic collapse, labor-strike, supply-chain disruption, or even a major factory breakdown, which can disrupt its normal functioning . But that does not absolve the company from its obligations such as lease payments, interest payments, and salaries. In addition, failure to service debt and bank loans can seriously hurts its reputation, making funding extremely expensive in the future, if at all it survives. Landec is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
Can LNDC service its debt comfortably?
Debt to equity ratio tells you if the company faces tough times or goes out of business, how much assets the debtors could claim. In the case of Landec, the debt-to-equity ratio is 25.7% and this means Landec’s debt-levels don’t pose any threat to its operations right now . While debt-to-equity ratio has several factors at play, an easier way to check whether it’s at a sustainable level is to check its ability to service the debt. A company generating earnings at least 5x of its interest payments is considered financially sound. In addition, with such a coverage ratio, the earnings remain more stable. In LNDC’s case the company is making a loss, therefore interest on debt is not well covered by earnings.
These balance sheet checks are a fine starting point to decide whether a company is worth your consideration; however, its growth profile and track record are equally important in deciding whether it’s doing better than its peers. I recommend you see our latest FREE analysis on Landec.