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Scatec Solar ASA (OB:SSO) is a small-cap stock with a market capitalization of ØRE4.74B. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into SSO here.
Does SSO generate enough cash through operations?
SSO has built up its total debt levels in the last twelve months, from ØRE5.27B to ØRE7.39B – this includes both the current and long-term debt. With this growth in debt, SSO’s cash and short-term investments stands at ØRE2.86B , ready to deploy into the business. Moreover, SSO has generated ØRE844.12M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 11.42%, meaning that SSO’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SSO’s case, it is able to generate 0.11x cash from its debt capital.
Can SSO meet its short-term obligations with the cash in hand?
Looking at SSO’s most recent ØRE935.43M liabilities, it seems that the business has been able to meet these commitments with a current assets level of ØRE3.66B, leading to a 3.91x current account ratio. However, a ratio greater than 3x may be considered as too high, as SSO could be holding too much capital in a low-return investment environment.
Does SSO face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, SSO is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 SSO’s case, the ratio of 1.45x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.