Standex International Corporation (NYSE:SXI) is a small-cap stock with a market capitalization of US$885m. 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? Understanding the company’s financial health becomes essential, since poor capital management may bring about 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, these checks don’t give you a full picture, so I recommend you dig deeper yourself into SXI here.
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Does SXI Produce Much Cash Relative To Its Debt?
Over the past year, SXI has ramped up its debt from US$205m to US$292m – this includes long-term debt. With this increase in debt, SXI currently has US$96m remaining in cash and short-term investments to keep the business going. Additionally, SXI has produced US$62m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 21%, signalling that SXI’s debt is appropriately covered by operating cash.
Does SXI’s liquid assets cover its short-term commitments?
Looking at SXI’s US$130m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$453m, leading to a 3.49x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can SXI service its debt comfortably?
With a debt-to-equity ratio of 61%, SXI can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if SXI’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SXI, the ratio of 8.64x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as SXI’s high interest coverage is seen as responsible and safe practice.
Although SXI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure SXI has company-specific issues impacting its capital structure decisions. You should continue to research Standex International to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SXI’s future growth? Take a look at our free research report of analyst consensus for SXI’s outlook.
- Valuation: What is SXI 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 SXI 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.
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 firstname.lastname@example.org. 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.