Investors are always looking for growth in small-cap stocks like SRG Limited (ASX:SRG), with a market cap of AU$112.98M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into SRG here.

Does SRG generate enough cash through operations?

Over the past year, SRG has ramped up its debt from AU$3.63M to AU$8.83M , which is mainly comprised of near term debt. With this growth in debt, SRG’s cash and short-term investments stands at AU$24.45M for investing into the business. Additionally, SRG has generated AU$6.96M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 78.81%, signalling that SRG’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 SRG’s case, it is able to generate 0.79x cash from its debt capital.

Can SRG pay its short-term liabilities?

Looking at SRG’s most recent AU$47.70M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.79x. For Construction companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

Is SRG’s debt level acceptable?

With debt at 14.01% of equity, SRG may be thought of as appropriately levered. This range is considered safe as SRG is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether SRG 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 SRG’s, case, the ratio of 17.79x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

SRG’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, 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 SRG has company-specific issues impacting its capital structure decisions. You should continue to research SRG to get a better picture of the stock by looking at: