Luby’s Inc (NYSE:LUB) is a small-cap stock with a market capitalization of US$83.63M. 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? Since LUB is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into LUB here.

How does LUB’s operating cash flow stack up against its debt?

Over the past year, LUB has reduced its debt from US$37.04M to US$31.07M – this includes both the current and long-term debt. With this debt payback, LUB currently has US$1.10M remaining in cash and short-term investments for investing into the business. Moreover, LUB has generated US$9.64M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 31.02%, signalling that LUB’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In LUB’s case, it is able to generate 0.31x cash from its debt capital.

Can LUB pay its short-term liabilities?

With current liabilities at US$44.38M, the company is not able to meet these obligations given the level of current assets of US$16.99M, with a current ratio of 0.38x below the prudent level of 3x.

Does LUB face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 22.01%, LUB’s debt level may be seen as prudent. LUB is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with LUB, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

LUB’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 lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how LUB has been performing in the past. I recommend you continue to research Luby’s to get a better picture of the stock by looking at:

• 1. Valuation: What is LUB 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 LUB is currently mispriced by the market.

• 2. Historical Performance: What has LUB’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

• 3. 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 pass 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.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.