Shriro Holdings Limited (ASX:SHM) is a small-cap stock with a market capitalization of AU$133.12M. 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? Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into SHM here.

How does SHM’s operating cash flow stack up against its debt?

Over the past year, SHM has maintained its debt levels at around AU$5.47M comprising of short- and long-term debt. At this current level of debt, SHM’s cash and short-term investments stands at AU$3.45M for investing into the business. Additionally, SHM has produced cash from operations of AU$17.20M during the same period of time, resulting in an operating cash to total debt ratio of 314.65%, meaning that SHM’s current level of operating cash is high enough to cover debt. 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 3.15x cash from its debt capital.

Can SHM meet its short-term obligations with the cash in hand?

With current liabilities at AU$36.30M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.3x. Usually, for Consumer 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 debt level acceptable?

SHM’s level of debt is low relative to its total equity, at 9.56%. This range is considered safe as SHM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether SHM 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 SHM’s, case, the ratio of 38.14x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SHM’s high interest coverage is seen as responsible and safe practice.

Next Steps:

SHM 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 proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure SHM has company-specific issues impacting its capital structure decisions. I recommend you continue to research Shriro Holdings to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for SHM’s future growth? Take a look at our free research report of analyst consensus for SHM’s outlook.

2. Valuation: What is SHM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SHM is currently mispriced by the market.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.