Public Joint-Stock North-Western Shipping Company (MISX:SZPR) is a small-cap stock with a market capitalization of RUРУБ2.61B. 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? So, understanding the company’s financial health becomes vital, 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. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into SZPR here.
Does SZPR generate an acceptable amount of cash through operations?
SZPR’s debt levels have fallen from RUРУБ12.16B to RUРУБ9.53B over the last 12 months – this includes both the current and long-term debt. With this debt payback, SZPR currently has RUРУБ911.71M remaining in cash and short-term investments , ready to deploy into the business. Additionally, SZPR has generated cash from operations of RUРУБ470.24M during the same period of time, leading to an operating cash to total debt ratio of 4.93%, signalling that SZPR’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SZPR’s case, it is able to generate 0.049x cash from its debt capital.
Can SZPR pay its short-term liabilities?
At the current liabilities level of RUРУБ5.73B liabilities, it seems that the business has been able to meet these obligations given the level of current assets of RUРУБ6.25B, with a current ratio of 1.09x. For Shipping companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does SZPR face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, SZPR is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SZPR’s case, the ratio of 1.15x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.