Layne Christensen Company (NASDAQ:LAYN) is a small-cap stock with a market capitalization of USD $263.83M. 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? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for Layne Christensen
How does LAYN’s operating cash flow stack up against its debt?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can LAYN pay off what it owes to its debtholder by using only cash from its operational activities? LAYN’s recent operating cash flow was 0.03 times its debt within the past year. This means what LAYN can generate on an annual basis only covers less than a tenth of what it actually owes its debtors in the near term, which raises a red flag.
Does LAYN’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? As cash flow from operation is hindered by adverse events, LAYN may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that LAYN does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Does LAYN face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. LAYN’s debt-to-equity ratio exceeds 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, LAYN has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may be different. I suggest researching market expectations for LAYN’s future growth on our free analysis platform.