Southern Cross Media Group Limited (ASX:SXL) is a small-cap stock with a market capitalization of AU$861.30M. 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? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into SXL here.

Does SXL generate enough cash through operations?

SXL has shrunken its total debt levels in the last twelve months, from AU$473.09M to AU$371.45M , which comprises of short- and long-term debt. With this debt payback, SXL currently has AU$48.98M remaining in cash and short-term investments , ready to deploy into the business. Moreover, SXL has produced AU$116.24M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 31.29%, signalling that SXL’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SXL’s case, it is able to generate 0.31x cash from its debt capital.

Does SXL’s liquid assets cover its short-term commitments?

With current liabilities at AU$115.93M, it appears that the company has been able to meet these obligations given the level of current assets of AU$206.99M, with a current ratio of 1.79x. Usually, for Media companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is SXL’s debt level acceptable?

With a debt-to-equity ratio of 54.62%, SXL can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether SXL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SXL’s, case, the ratio of 7.59x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SXL’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although SXL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around SXL’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure SXL has company-specific issues impacting its capital structure decisions. You should continue to research Southern Cross Media Group to get a better picture of the small-cap by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for SXL’s future growth? Take a look at our free research report of analyst consensus for SXL’s outlook.

• 2. Valuation: What is SXL 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 SXL is currently mispriced by the market.

• 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.