Investors are always looking for growth in small-cap stocks like LSL Property Services plc (LON:LSL), with a market cap of UK£225m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into LSL here.
Does LSL produce enough cash relative to debt?
LSL has built up its total debt levels in the last twelve months, from UK£42m to UK£63m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at UK£516k , ready to deploy into the business. On top of this, LSL has generated UK£24m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 38%, signalling that LSL’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LSL’s case, it is able to generate 0.38x cash from its debt capital.
Can LSL pay its short-term liabilities?
With current liabilities at UK£76m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.54x.
Can LSL service its debt comfortably?
LSL is a relatively highly levered company with a debt-to-equity of 43%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In LSL’s case, the ratio of 24.94x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving LSL ample headroom to grow its debt facilities.
LSL’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for LSL’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research LSL Property Services to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LSL’s future growth? Take a look at our free research report of analyst consensus for LSL’s outlook.
- Valuation: What is LSL 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 LSL 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.
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