Investors are always looking for growth in small-cap stocks like Sky Solar Holdings Ltd (NASDAQ:SKYS), with a market cap of $80.24M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into SKYS here.
Does SKYS generate an acceptable amount of cash through operations?
Over the past year, SKYS has ramped up its debt from $104.5M to $164.3M – this includes both the current and long-term debt. With this growth in debt, SKYS’s cash and short-term investments stands at $12.7M for investing into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of SKYS’s operating efficiency ratios such as ROA here.
Can SKYS pay its short-term liabilities?
At the current liabilities level of $69.1M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.4x. For renewable energy companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SKYS’s level of debt at an acceptable level?
With total debt exceeding equities, SKYS is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SKYS 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 SKYS’s, case, the ratio of 0.29x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SKYS’s low interest coverage already puts the company at higher risk of default.
Are you a shareholder? At its current level of cash flow coverage, SKYS has room for improvement to better cushion for events which may require debt repayment. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may be different. I recommend keeping abreast of market expectations for SKYS’s future growth on our free analysis platform.
Are you a potential investor? With a high level of debt on its balance sheet, SKYS could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for SKYS to increase its operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. You should continue your analysis by taking a look at SKYS’s past performance analysis on our free platform to figure out SKYS’s financial health position.
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.