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Investors are always looking for growth in small-cap stocks like The L.S. Starrett Company (NYSE:SCX), with a market cap of US$44m. However, an important fact which most ignore is: how financially healthy is the business? 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. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SCX here.
How does SCX’s operating cash flow stack up against its debt?
SCX has shrunken its total debt levels in the last twelve months, from US$22m to US$20m – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$13m , ready to deploy into the business. Moreover, SCX has produced US$6.2m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 30%, meaning that SCX’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SCX’s case, it is able to generate 0.3x cash from its debt capital.
Does SCX’s liquid assets cover its short-term commitments?
With current liabilities at US$26m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.36x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Is SCX’s debt level acceptable?
With debt at 23% of equity, SCX may be thought of as appropriately levered. This range is considered safe as SCX is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether SCX 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 SCX’s, case, the ratio of 10.99x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SCX ample headroom to grow its debt facilities.
SCX’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for SCX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research L.S. Starrett to get a more holistic view of the stock by looking at:
- 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.
- 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.
- 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 firstname.lastname@example.org.