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What Does SeaLink Travel Group Limited's (ASX:SLK) Balance Sheet Tell Us About It?

Simply Wall St

While small-cap stocks, such as SeaLink Travel Group Limited (ASX:SLK) with its market cap of AU$375m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into SLK here.

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Does SLK Produce Much Cash Relative To Its Debt?

Over the past year, SLK has ramped up its debt from AU$67m to AU$110m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$15m to keep the business going. Moreover, SLK has generated AU$40m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 36%, meaning that SLK’s current level of operating cash is high enough to cover debt.

Can SLK pay its short-term liabilities?

At the current liabilities level of AU$36m, it seems that the business has been able to meet these obligations given the level of current assets of AU$38m, with a current ratio of 1.08x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Hospitality companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

ASX:SLK Historical Debt, May 26th 2019

Can SLK service its debt comfortably?

With debt reaching 70% of equity, SLK may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if SLK’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 SLK, the ratio of 9.23x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as SLK’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although SLK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how SLK has been performing in the past. I recommend you continue to research SeaLink Travel Group to get a better picture of the small-cap by looking at:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.