While small-cap stocks, such as Superior Drilling Products, Inc. (NYSEMKT:SDPI) with its market cap of US$28m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that SDPI is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into SDPI here.
Does SDPI Produce Much Cash Relative To Its Debt?
SDPI’s debt levels have fallen from US$13m to US$11m over the last 12 months – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$4.3m , ready to be used for running the business. Additionally, SDPI has generated US$4.6m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 43%, indicating that SDPI’s debt is appropriately covered by operating cash.
Can SDPI meet its short-term obligations with the cash in hand?
With current liabilities at US$5.9m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.29x. The current ratio is the number you get when you divide current assets by current liabilities. For Energy Services companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SDPI service its debt comfortably?
SDPI is a relatively highly levered company with a debt-to-equity of 74%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since SDPI is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
SDPI’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 SDPI’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure SDPI has company-specific issues impacting its capital structure decisions. You should continue to research Superior Drilling Products to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SDPI’s future growth? Take a look at our free research report of analyst consensus for SDPI’s outlook.
- Valuation: What is SDPI 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 SDPI 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.
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