Investors are always looking for growth in small-cap stocks like Smiths City Group Limited (NZSE:SCY), with a market cap of NZ$27.92M. However, an important fact which most ignore is: how financially healthy is the business? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, 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. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into SCY here.
Does SCY generate an acceptable amount of cash through operations?
Over the past year, SCY has reduced its debt from NZ$56.20M to NZ$53.30M , which is made up of current and long term debt. With this debt payback, SCY currently has NZ$12.00M remaining in cash and short-term investments for investing into the business. On top of this, SCY has produced NZ$6.80M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 12.76%, signalling that SCY’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SCY’s case, it is able to generate 0.13x cash from its debt capital.
Can SCY pay its short-term liabilities?
With current liabilities at NZ$26.40M, it seems that the business has been able to meet these commitments with a current assets level of NZ$94.50M, leading to a 3.58x current account ratio. Though, anything above 3x is considered high and could mean that SCY has too much idle capital in low-earning investments.
Does SCY face the risk of succumbing to its debt-load?
SCY is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SCY’s case, the ratio of 1.16x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
SCY’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how SCY has been performing in the past. I suggest you continue to research Smiths City Group to get a better picture of the stock by looking at: