While small-cap stocks, such as The LS Starrett Company (NYSE:SCX) with its market cap of US$45.80m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since SCX is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into SCX here.
How much cash does SCX generate through its 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 debt payback, SCX’s cash and short-term investments stands at US$14.61m for investing into the business. Additionally, SCX has produced cash from operations of US$2.89m over the same time period, resulting in an operating cash to total debt ratio of 16.40%, indicating that SCX’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional 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.
Can SCX pay its short-term liabilities?
With current liabilities at US$30.74m, it seems that the business has been able to meet these obligations given the level of current assets of US$110.12m, with a current ratio of 3.58x. However, anything about 3x may be excessive, since SCX may be leaving too much capital in low-earning investments.
Does SCX face the risk of succumbing to its debt-load?SCX’s level of debt is appropriate relative to its total equity, at 25.75%. This range is considered safe as SCX is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for SCX, and the company also has the ability and headroom to increase debt if needed going forward.
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 will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure SCX has company-specific issues impacting its capital structure decisions. I recommend you continue to research L.S. Starrett to get a better picture of the stock by looking at:
- 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.