While small-cap stocks, such as SP Plus Corporation (NASDAQ:SP) with its market cap of US$775m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about 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 just a partial view of the stock, and I suggest you dig deeper yourself into SP here.
Does SP Produce Much Cash Relative To Its Debt?
SP has built up its total debt levels in the last twelve months, from US$154m to US$387m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$40m to keep the business going. Additionally, SP has generated cash from operations of US$71m over the same time period, resulting in an operating cash to total debt ratio of 18%, meaning that SP’s debt is not covered by operating cash.
Can SP pay its short-term liabilities?
With current liabilities at US$247m, the company may not be able to easily meet these obligations given the level of current assets of US$208m, with a current ratio of 0.84x. The current ratio is calculated by dividing current assets by current liabilities.
Does SP face the risk of succumbing to its debt-load?
With total debt exceeding equity, SP is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if SP’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 SP, the ratio of 9.04x suggests that interest is appropriately 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.
SP’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure SP has company-specific issues impacting its capital structure decisions. You should continue to research SP Plus to get a more holistic view of the stock by looking at:
- Valuation: What is SP 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 SP is currently mispriced by the market.
- Historical Performance: What has SP's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 firstname.lastname@example.org. 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.