Seneca Foods Corporation (NASDAQ:SENE.A) is a small-cap stock with a market capitalization of $306.63M. 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? So, 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. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into SENE.A here.
How does SENE.A’s operating cash flow stack up against its debt?
SENE.A’s debt levels surged from $321.2M to $371.8M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at $12.0M for investing into the business. Additionally, SENE.A has produced $24.3M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 6.54%, indicating that SENE.A’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SENE.A’s case, it is able to generate 0.07x cash from its debt capital.
Can SENE.A pay its short-term liabilities?
With current liabilities at $132.3M, it seems that the business has been able to meet these commitments with a current assets level of $688.3M, leading to a 5.2x current account ratio. However, a ratio greater than 3x may be considered as too high, as SENE.A could be holding too much capital in a low-return investment environment.
Is SENE.A’s debt level acceptable?With total debt exceeding equities, SENE.A is considered a highly levered 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 test if SENE.A’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 SENE.A, the ratio of 1.42x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SENE.A’s low interest coverage already puts the company at higher risk of default.
At its current level of cash flow coverage, SENE.A has room for improvement to better cushion for events which may require debt repayment. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. This is only a rough assessment of financial health, and I’m sure SENE.A has company-specific issues impacting its capital structure decisions. You should continue to research Seneca Foods to get a better picture of the stock by looking at:
1. Historical Performance: What has SENE.A’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.
2. 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.