U.S. Silica Holdings, Inc. (NYSE:SLCA) is a small-cap stock with a market capitalization of US$794m. 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? Companies operating in the Energy Services industry, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into SLCA here.
Does SLCA produce enough cash relative to debt?
SLCA has built up its total debt levels in the last twelve months, from US$513m to US$1.3b , which accounts for long term debt. With this rise in debt, SLCA currently has US$346m remaining in cash and short-term investments , ready to deploy into the business. Additionally, SLCA has generated cash from operations of US$345m over the same time period, resulting in an operating cash to total debt ratio of 27%, meaning that SLCA’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SLCA’s case, it is able to generate 0.27x cash from its debt capital.
Can SLCA meet its short-term obligations with the cash in hand?
At the current liabilities level of US$286m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.75x. Generally, for Energy Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is SLCA’s debt level acceptable?
With a debt-to-equity ratio of 92%, SLCA can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether SLCA 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 SLCA’s, case, the ratio of 3.81x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
SLCA’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for SLCA’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research U.S. Silica Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SLCA’s future growth? Take a look at our free research report of analyst consensus for SLCA’s outlook.
- Valuation: What is SLCA 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 SLCA 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.
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 editorial-team@simplywallst.com.