What does The LS. Starrett Company's (NYSE:SCX) Balance Sheet Tell Us About Its Future?

While small-cap stocks, such as The LS. Starrett Company (NYSE:SCX) with its market cap of US$52.06M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that SCX is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into SCX here.

Does SCX generate enough cash through operations?

SCX's debt levels have fallen from US$18.65M to US$17.61M over the last 12 months , which is made up of current and long term debt. With this reduction in debt, SCX's cash and short-term investments stands at US$14.61M , ready to deploy into the business. Additionally, SCX has produced cash from operations of US$2.89M during the same period of time, leading to an operating cash to total debt ratio of 16.40%, indicating that SCX’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In SCX’s case, it is able to generate 0.16x cash from its debt capital.

Does SCX’s liquid assets cover its short-term commitments?

Looking at SCX’s most recent US$30.74M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.58x. However, a ratio greater than 3x may be considered as too high, as SCX could be holding too much capital in a low-return investment environment.

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

With debt at 26.24% of equity, SCX may be thought of as appropriately levered. SCX is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. SCX's risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

Although SCX’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how SCX has been performing in the past. I recommend you continue to research L.S. Starrett to get a better picture of the stock by looking at:

• 1. Valuation: What is SCX 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 SCX is currently mispriced by the market.
• 2. Historical Performance: What has SCX's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
• 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.