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While small-cap stocks, such as Odfjell SE (OB:ODF) with its market cap of ØRE2.39B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to 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, I know these factors are very high-level, so I recommend you dig deeper yourself into ODF here.
Does ODF generate enough cash through operations?
Over the past year, ODF has maintained its debt levels at around US$1.08B comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$206.59M , ready to deploy into the business. Additionally, ODF has generated US$53.54M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 4.94%, meaning that ODF’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ODF’s case, it is able to generate 0.049x cash from its debt capital.
Does ODF’s liquid assets cover its short-term commitments?
With current liabilities at US$329.17M, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.99x, which is below the prudent industry ratio of 3x.
Does ODF face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, ODF is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if ODF’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 ODF, the ratio of 0.65x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
ODF’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how ODF has been performing in the past. You should continue to research Odfjell to get a better picture of the stock by looking at: