Investors are always looking for growth in small-cap stocks like Sutton Harbour Holdings plc (AIM:SUH), with a market cap of GBP £25.27M. However, an important fact which most ignore is: how financially healthy is the business? 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 a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into SUH here.
Does SUH generate enough cash through operations?
SUH’s debt level has been constant at around £23M over the previous year made up of current and long term debt. At this stable level of debt, SUH currently has £1M remaining in cash and short-term investments for investing into the business. Additionally, SUH has generated cash from operations of £1M in the last twelve months, resulting in an operating cash to total debt ratio of 0.04x, signalling that SUH’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SUH’s case, it is able to generate 0.04x cash from its debt capital.
Can SUH pay its short-term liabilities?
With current liabilities at £3M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of £23M, with a current ratio of 8.2x. Though, anything about 3x may be excessive, since SUH may be leaving too much capital in low-earning investments.
Can SUH service its debt comfortably?
SUH is a relatively highly levered company with a debt-to-equity of 57.89%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if SUH’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SUH, the ratio of 1.54x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SUH’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Are you a shareholder? SUH’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. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that SUH’s financial situation may change. I recommend keeping abreast of market expectations for SUH’s future growth on our free analysis platform.