Luxfer Holdings PLC (NYSE:LXFR) is a small-cap stock with a market capitalization of US$384.65M. 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? So, understanding the company’s financial health becomes essential, since poor capital management may bring about 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, since I only look at basic financial figures, I recommend you dig deeper yourself into LXFR here.

Does LXFR generate enough cash through operations?

LXFR’s debt levels have fallen from US$131.60M to US$121.00M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, LXFR currently has US$13.60M remaining in cash and short-term investments for investing into the business. Additionally, LXFR has generated cash from operations of US$29.20M in the last twelve months, leading to an operating cash to total debt ratio of 24.13%, meaning that LXFR’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LXFR’s case, it is able to generate 0.24x cash from its debt capital.

Can LXFR meet its short-term obligations with the cash in hand?

With current liabilities at US$54.00M, it appears that the company has been able to meet these commitments with a current assets level of US$156.10M, leading to a 2.89x current account ratio. For Machinery companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

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

With debt reaching 69.91% of equity, LXFR may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if LXFR’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 LXFR, the ratio of 5.22x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving LXFR ample headroom to grow its debt facilities.

Next Steps:

At its current level of cash flow coverage, LXFR has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure LXFR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Luxfer Holdings to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.

• 1. Valuation: What is LXFR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in this free research report helps visualize whether LXFR is currently mispriced by the market.

• 2. Historical Performance: What has LXFR’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 LXFR’s historicals for more clarity.

• 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore a 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.