Ichor Holdings Ltd (NASDAQ:ICHR) is a small-cap stock with a market capitalization of $703.69M. 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? Semiconductor companies, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. 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 ICHR here.
Does ICHR generate enough cash through operations?
Over the past year, ICHR has reduced its debt from $62.6M to $37.9M – this includes both the current and long-term debt. With this debt payback, ICHR currently has $50.9M remaining in cash and short-term investments , ready to deploy into the business. On top of this, ICHR has generated cash from operations of $27.7M over the same time period, resulting in an operating cash to total debt ratio of 73.08%, indicating that ICHR’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ICHR’s case, it is able to generate 0.73x cash from its debt capital.
Can ICHR meet its short-term obligations with the cash in hand?
Looking at ICHR’s most recent $101.1M liabilities, it seems that the business has been able to meet these commitments with a current assets level of $157.1M, leading to a 1.55x current account ratio. Generally, for Semiconductor companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ICHR face the risk of succumbing to its debt-load?
ICHR’s level of debt is appropriate relative to its total equity, at 34.96%. This range is considered safe as ICHR is not taking on too much debt obligation, which may be constraining for future growth. We can test if ICHR’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 ICHR, the ratio of 14.75x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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ICHR’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for ICHR’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Ichor Holdings to get a better picture of the stock by looking at: