Shriro Holdings Limited (ASX:SHM) is a small-cap stock with a market capitalization of AUD A$130.15M. 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? Companies operating in the household durables industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. 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 SHM here.
How does SHM’s operating cash flow stack up against its debt?
SHM’s debt levels have fallen from A$10M to A$6M over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, SHM currently has A$0M remaining in cash and short-term investments , ready to deploy into the business. Moreover, SHM has produced cash from operations of A$16M over the same time period, leading to an operating cash to total debt ratio of 2.87x, meaning that SHM’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SHM’s case, it is able to generate 2.87x cash from its debt capital.
Does SHM’s liquid assets cover its short-term commitments?
Looking at SHM’s most recent A$33M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of A$76M, with a current ratio of 2.3x. Usually, for household durables companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is SHM’s level of debt at an acceptable level?
With debt at 6.93% of equity, SHM may be thought of as having low leverage. SHM is not taking on too much debt commitment, which may be constraining for future growth. We can test if SHM’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 SHM, the ratio of 24.28x suggests that interest is excessively 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:
Are you a shareholder? SHM’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 will be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may be different. I recommend researching market expectations for SHM’s future growth on our free analysis platform.