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While small-cap stocks, such as South Port New Zealand Limited (NZSE:SPN) with its market cap of NZ$190m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, 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’d encourage you to dig deeper yourself into SPN here.
How much cash does SPN generate through its operations?
SPN’s debt levels have fallen from NZ$10m to NZ$8m over the last 12 months – this includes both the current and long-term debt. With this debt repayment, SPN currently has NZ$991k remaining in cash and short-term investments , ready to deploy into the business. Moreover, SPN has generated cash from operations of NZ$12m during the same period of time, leading to an operating cash to total debt ratio of 163%, signalling that SPN’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 SPN’s case, it is able to generate 1.63x cash from its debt capital.
Does SPN’s liquid assets cover its short-term commitments?
At the current liabilities level of NZ$6m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.08x. For Infrastructure companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can SPN service its debt comfortably?
SPN’s level of debt is appropriate relative to its total equity, at 19%. This range is considered safe as SPN is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether SPN 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 SPN’s, case, the ratio of 23.83x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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SPN has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for SPN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research South Port New Zealand to get a better picture of the stock by looking at: