While small-cap stocks, such as Switch, Inc. (NYSE:SWCH) with its market cap of US$2.6b, 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into SWCH here.
Does SWCH Produce Much Cash Relative To Its Debt?
SWCH's debt level has been constant at around US$606m over the previous year including long-term debt. At this stable level of debt, SWCH's cash and short-term investments stands at US$82m , ready to be used for running the business. On top of this, SWCH has produced US$178m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 29%, signalling that SWCH’s current level of operating cash is high enough to cover debt.
Can SWCH meet its short-term obligations with the cash in hand?
At the current liabilities level of US$75m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.44x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for IT companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does SWCH face the risk of succumbing to its debt-load?
With debt reaching 86% of equity, SWCH 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 check to see whether SWCH 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 SWCH's, case, the ratio of 2.28x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Although SWCH’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. I admit this is a fairly basic analysis for SWCH's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Switch to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SWCH’s future growth? Take a look at our free research report of analyst consensus for SWCH’s outlook.
- Valuation: What is SWCH 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 SWCH is currently mispriced by the market.
- 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.
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