While small-cap stocks, such as Smart Sand, Inc. (NASDAQ:SND) with its market cap of US$141m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into SND here.
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Does SND Produce Much Cash Relative To Its Debt?
Over the past year, SND has ramped up its debt from US$16m to US$88m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$2.4m , ready to be used for running the business. On top of this, SND has produced cash from operations of US$59m over the same time period, leading to an operating cash to total debt ratio of 67%, indicating that SND’s operating cash is sufficient to cover its debt.
Can SND meet its short-term obligations with the cash in hand?
Looking at SND’s US$39m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$58m, with a current ratio of 1.47x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Energy Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does SND face the risk of succumbing to its debt-load?
SND is a relatively highly levered company with a debt-to-equity of 41%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if SND’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 SND, the ratio of 15.21x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SND ample headroom to grow its debt facilities.
SND’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 SND’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SND’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Smart Sand to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SND’s future growth? Take a look at our free research report of analyst consensus for SND’s outlook.
- Valuation: What is SND 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 SND 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.