While small-cap stocks, such as Star Group LP (NYSE:SGU) with its market cap of $573.38M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into SGU here.
Does SGU generate enough cash through operations?
Over the past year, SGU has reduced its debt from $100.0M to $92.5M – this includes both the current and long-term debt. With this reduction in debt, SGU currently has $139.2M remaining in cash and short-term investments , ready to deploy into the business. Moreover, SGU has generated $102.0M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 1.1x, indicating that SGU’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 SGU’s case, it is able to generate 1.1x cash from its debt capital.
Can SGU meet its short-term obligations with the cash in hand?
With current liabilities at $289.9M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.02x. Generally, for gas utilities companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is SGU’s level of debt at an acceptable level?
With debt at 23.75% of equity, SGU may be thought of as appropriately levered. This range is considered safe as SGU is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether SGU is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In SGU’s, case, the ratio of 5.82x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SGU’s high interest coverage is seen as responsible and safe practice.
Are you a shareholder? SGU’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that SGU’s financial situation may change. I recommend keeping abreast of market expectations for SGU’s future growth on our free analysis platform.
Are you a potential investor? Star Group currently has financial flexibility to ramp up growth in the future. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to also examine the company’s track record. As a following step, you should take a look at SGU’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.