Is Lassonde Industries Inc.’s (TSE:LAS.A) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Lassonde Industries Inc. (TSE:LAS.A), with a market cap of CA$1.2b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into LAS.A here.

LAS.A’s Debt (And Cash Flows)

LAS.A’s debt levels surged from CA$196m to CA$351m over the last 12 months , which includes long-term debt. With this rise in debt, LAS.A’s cash and short-term investments stands at CA$278k , ready to be used for running the business. Moreover, LAS.A has produced CA$100m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 29%, meaning that LAS.A’s operating cash is sufficient to cover its debt.

Does LAS.A’s liquid assets cover its short-term commitments?

Looking at LAS.A’s CA$224m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.83x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Food companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

TSX:LAS.A Historical Debt, March 25th 2019
TSX:LAS.A Historical Debt, March 25th 2019

Is LAS.A’s debt level acceptable?

With debt reaching 51% of equity, LAS.A may be thought of as relatively highly levered. 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 LAS.A’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 LAS.A, the ratio of 9.11x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

LAS.A’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around LAS.A’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how LAS.A has been performing in the past. You should continue to research Lassonde Industries to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for LAS.A’s future growth? Take a look at our free research report of analyst consensus for LAS.A’s outlook.
  2. Valuation: What is LAS.A 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 LAS.A is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.