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While small-cap stocks, such as Leon’s Furniture Limited (TSE:LNF) with its market cap of CA$1.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes 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. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into LNF here.
LNF’s Debt (And Cash Flows)
Over the past year, LNF has ramped up its debt from CA$248m to CA$608m – this includes long-term debt. With this rise in debt, LNF currently has CA$101m remaining in cash and short-term investments , ready to be used for running the business. On top of this, LNF has produced CA$129m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 21%, indicating that LNF’s current level of operating cash is high enough to cover debt.
Can LNF pay its short-term liabilities?
Looking at LNF’s CA$598m in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.99x. The current ratio is calculated by dividing current assets by current liabilities.
Is LNF’s debt level acceptable?
LNF is a relatively highly levered company with a debt-to-equity of 71%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether LNF is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In LNF’s, case, the ratio of 13.46x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving LNF ample headroom to grow its debt facilities.
LNF’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. However, 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 LNF has been performing in the past. You should continue to research Leon’s Furniture to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LNF’s future growth? Take a look at our free research report of analyst consensus for LNF’s outlook.
- Valuation: What is LNF 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 LNF 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.
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 firstname.lastname@example.org. 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.