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While small-cap stocks, such as Shaver Shop Group Limited (ASX:SSG) with its market cap of AU$55.63M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SSG here.
Does SSG generate enough cash through operations?
SSG’s debt levels surged from AU$5.12M to AU$11.82M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at AU$2.39M for investing into the business. Additionally, SSG has generated AU$3.42M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 28.89%, signalling that SSG’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SSG’s case, it is able to generate 0.29x cash from its debt capital.
Does SSG’s liquid assets cover its short-term commitments?
Looking at SSG’s most recent AU$14.62M liabilities, it appears that the company has been able to meet these commitments with a current assets level of AU$33.41M, leading to a 2.29x current account ratio. Usually, for Specialty Retail companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SSG’s debt level acceptable?
With debt at 11.68% of equity, SSG may be thought of as appropriately levered. SSG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether SSG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SSG’s, case, the ratio of 32.43x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SSG ample headroom to grow its debt facilities.
Next Steps:
SSG has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how SSG has been performing in the past. I recommend you continue to research Shaver Shop Group to get a better picture of the stock by looking at: