Lindsay Australia Limited (ASX:LAU) is a small-cap stock with a market capitalization of AU$110m. 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? Understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into LAU here.
LAU’s Debt (And Cash Flows)
Over the past year, LAU has ramped up its debt from AU$115m to AU$124m , which accounts for long term debt. With this growth in debt, LAU currently has AU$14m remaining in cash and short-term investments , ready to be used for running the business. Moreover, LAU has produced cash from operations of AU$40m over the same time period, resulting in an operating cash to total debt ratio of 32%, indicating that LAU’s current level of operating cash is high enough to cover debt.
Can LAU pay its short-term liabilities?
With current liabilities at AU$82m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.05x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Transportation companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can LAU service its debt comfortably?
LAU is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if LAU’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LAU, the ratio of 2.9x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Although LAU’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for LAU’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Lindsay Australia to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LAU’s future growth? Take a look at our free research report of analyst consensus for LAU’s outlook.
- Valuation: What is LAU 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 LAU 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.
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