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While small-cap stocks, such as Superloop Limited (ASX:SLC) with its market cap of AU$462m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Telecom businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. 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’d encourage you to dig deeper yourself into SLC here.
How much cash does SLC generate through its operations?
SLC’s debt levels surged from AU$30m to AU$63m over the last 12 months – this includes both the current and long-term debt. With this rise in debt, SLC currently has AU$16m remaining in cash and short-term investments , ready to deploy into the business. Moreover, SLC has generated cash from operations of AU$38m over the same time period, resulting in an operating cash to total debt ratio of 60%, meaning that SLC’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 SLC’s case, it is able to generate 0.6x cash from its debt capital.
Can SLC meet its short-term obligations with the cash in hand?
Looking at SLC’s most recent AU$42m liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.85x.
Can SLC service its debt comfortably?
With a debt-to-equity ratio of 16%, SLC’s debt level may be seen as prudent. This range is considered safe as SLC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if SLC’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 SLC, the ratio of 3.79x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SLC’s high interest coverage is seen as responsible and safe practice.
Next Steps:
SLC’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, as shareholders, you should try and determine whether this level of debt is justified for SLC, especially if meeting short-term obligations could also bring about issues. Keep in mind I haven’t considered other factors such as how SLC has been performing in the past. I recommend you continue to research Superloop to get a better picture of the stock by looking at: