Investors are always looking for growth in small-cap stocks like StarTek Inc (NYSE:SRT), with a market cap of US$149.68M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the IT industry, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SRT here.
Does SRT generate enough cash through operations?
SRT has shrunken its total debt levels in the last twelve months, from US$34.27M to US$24.93M , which comprises of short- and long-term debt. With this debt payback, SRT currently has US$1.46M remaining in cash and short-term investments , ready to deploy into the business. Additionally, SRT has generated cash from operations of US$15.53M in the last twelve months, resulting in an operating cash to total debt ratio of 62.28%, meaning that SRT’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In SRT’s case, it is able to generate 0.62x cash from its debt capital.
Can SRT meet its short-term obligations with the cash in hand?
Looking at SRT’s most recent US$25.95M liabilities, the company has been able to meet these obligations given the level of current assets of US$58.15M, with a current ratio of 2.24x. Usually, for IT companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does SRT face the risk of succumbing to its debt-load?
With debt reaching 53.11% of equity, SRT may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since SRT is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although SRT’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for SRT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research StarTek to get a more holistic view of the small-cap by looking at: