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While small-cap stocks, such as SunLink Health Systems Inc (NYSEMKT:SSY) with its market cap of US$9.8m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Healthcare industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into SSY here.
How does SSY’s operating cash flow stack up against its debt?
SSY’s debt levels have fallen from US$6.7m to US$3.1m over the last 12 months , which comprises of short- and long-term debt. With this debt payback, SSY’s cash and short-term investments stands at US$3.5m , ready to deploy into the business. Additionally, SSY has generated US$396.0k in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 12.9%, meaning that SSY’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In SSY’s case, it is able to generate 0.13x cash from its debt capital.
Can SSY meet its short-term obligations with the cash in hand?
With current liabilities at US$4.9m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.7x. Generally, for Healthcare companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does SSY face the risk of succumbing to its debt-load?
With debt at 17.8% of equity, SSY may be thought of as appropriately levered. This range is considered safe as SSY is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. SSY’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
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SSY’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure SSY has company-specific issues impacting its capital structure decisions. I suggest you continue to research SunLink Health Systems to get a better picture of the stock by looking at: