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While small-cap stocks, such as Limoneira Company (NASDAQ:LMNR) with its market cap of US$441m, 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into LMNR here.
Does LMNR produce enough cash relative to debt?
Over the past year, LMNR has reduced its debt from US$101m to US$74m , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$505k , ready to deploy into the business. Additionally, LMNR has generated cash from operations of US$22m over the same time period, leading to an operating cash to total debt ratio of 29%, meaning that LMNR’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LMNR’s case, it is able to generate 0.29x cash from its debt capital.
Can LMNR meet its short-term obligations with the cash in hand?
At the current liabilities level of US$27m liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$27m, with a current ratio of 0.99x.
Does LMNR face the risk of succumbing to its debt-load?
LMNR’s level of debt is appropriate relative to its total equity, at 31%. LMNR is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether LMNR 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 LMNR’s, case, the ratio of 12.71x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving LMNR ample headroom to grow its debt facilities.
Next Steps:
LMNR’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure LMNR has company-specific issues impacting its capital structure decisions. I recommend you continue to research Limoneira to get a better picture of the stock by looking at: