How Financially Strong Is Sterling Construction Company, Inc. (NASDAQ:STRL)?

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Sterling Construction Company, Inc. (NASDAQ:STRL) is a small-cap stock with a market capitalization of US$361m. 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? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into STRL here.

Does STRL Produce Much Cash Relative To Its Debt?

STRL has shrunk its total debt levels in the last twelve months, from US$90m to US$82m , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$94m , ready to be used for running the business. Moreover, STRL has generated US$39m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 48%, meaning that STRL’s debt is appropriately covered by operating cash.

Can STRL pay its short-term liabilities?

Looking at STRL’s US$179m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.69x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Construction companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqGS:STRL Historical Debt, May 1st 2019
NasdaqGS:STRL Historical Debt, May 1st 2019

Does STRL face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 48%, STRL can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether STRL 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 STRL’s, case, the ratio of 2.57x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

STRL’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 STRL’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure STRL has company-specific issues impacting its capital structure decisions. You should continue to research Sterling Construction Company to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for STRL’s future growth? Take a look at our free research report of analyst consensus for STRL’s outlook.
  2. Valuation: What is STRL 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 STRL 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.