Investors are always looking for growth in small-cap stocks like SKY Network Television Limited (NZSE:SKT), with a market cap of NZ$1.11B. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis 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, this commentary is still very high-level, so I recommend you dig deeper yourself into SKT here.
How does SKT’s operating cash flow stack up against its debt?
SKT’s debt levels have fallen from NZ$348.1M to NZ$298.7M over the last 12 months , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at NZ$5.4M for investing into the business. Additionally, SKT has generated NZ$245.3M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 82.12%, indicating that SKT’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 SKT’s case, it is able to generate 0.82x cash from its debt capital.
Can SKT meet its short-term obligations with the cash in hand?
Looking at SKT’s most recent NZ$217.0M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.71x, which is below the prudent industry ratio of 3x.
Does SKT face the risk of succumbing to its debt-load?
SKT’s level of debt is appropriate relative to its total equity, at 22.49%. This range is considered safe as SKT is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if SKT’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 SKT, the ratio of 9.25x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SKT’s high interest coverage is seen as responsible and safe practice.
Next Steps:
SKT’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Though, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how SKT has been performing in the past. I suggest you continue to research SKY Network Television to get a more holistic view of the stock by looking at: