While small-cap stocks, such as Innophos Holdings, Inc. (NASDAQ:IPHS) with its market cap of US$609m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes crucial, since poor capital management may bring about 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, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into IPHS here.
Does IPHS Produce Much Cash Relative To Its Debt?
IPHS has sustained its debt level by about US$300m over the last 12 months which accounts for long term debt. At this stable level of debt, IPHS’s cash and short-term investments stands at US$20m , ready to be used for running the business. Additionally, IPHS has generated US$74m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 25%, indicating that IPHS’s operating cash is sufficient to cover its debt.
Can IPHS meet its short-term obligations with the cash in hand?
With current liabilities at US$130m, the company has been able to meet these commitments with a current assets level of US$327m, leading to a 2.52x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Chemicals companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is IPHS’s debt level acceptable?
With debt reaching 89% of equity, IPHS may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether IPHS 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 IPHS’s, case, the ratio of 4.99x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving IPHS ample headroom to grow its debt facilities.
IPHS’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 IPHS’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how IPHS has been performing in the past. You should continue to research Innophos Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IPHS’s future growth? Take a look at our free research report of analyst consensus for IPHS’s outlook.
- Valuation: What is IPHS 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 IPHS 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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