London Security Plc (LON:LSC) is a small-cap stock with a market capitalization of UK£256.26m. 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? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into LSC here.
How much cash does LSC generate through its operations?
LSC has shrunken its total debt levels in the last twelve months, from UK£12.83m to UK£11.18m . With this reduction in debt, LSC currently has UK£24.65m remaining in cash and short-term investments , ready to deploy into the business. Additionally, LSC has generated cash from operations of UK£17.57m in the last twelve months, leading to an operating cash to total debt ratio of 157.12%, indicating that LSC’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LSC’s case, it is able to generate 1.57x cash from its debt capital.
Can LSC pay its short-term liabilities?
Looking at LSC’s most recent UK£32.45m liabilities, it seems that the business has been able to meet these commitments with a current assets level of UK£62.46m, leading to a 1.92x current account ratio. Generally, for Machinery companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is LSC’s debt level acceptable?With a debt-to-equity ratio of 10.79%, LSC’s debt level may be seen as prudent. This range is considered safe as LSC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether LSC 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 LSC’s, case, the ratio of 62.48x suggests that interest is comfortably 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.
LSC’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for LSC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research London Security to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LSC’s future growth? Take a look at our free research report of analyst consensus for LSC’s outlook.
- Valuation: What is LSC 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 LSC 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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.