While small-cap stocks, such as Shaver Shop Group Limited (ASX:SSG) with its market cap of AUD A$61.93M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for Shaver Shop Group
Does SSG generate enough cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of SSG, operating cash flow turned out to be 0.29x its debt level over the past twelve months. A ratio of over a 0.25x is a positive sign and shows that SSG is generating ample cash from its core business, which should increase its potential to pay back near-term debt.
Can SSG meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? As cash flow from operation is hindered by adverse events, SSG 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 SSG does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is SSG’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. SSG’s debt-to-equity ratio stands at 20.01%, which means its debt level does not pose a threat to its operations right now. We can test if SSG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. In SSG’s case, its interest is excessively covered by its earnings as the ratio sits at 33.1x. Debtors may be willing to loan the company more money, giving SSG ample headroom to grow its debt facilities.