While small-cap stocks, such as Star Group LP (NYSE:SGU) with its market cap of US$515.36m, 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into SGU here.
How does SGU’s operating cash flow stack up against its debt?
SGU has shrunken its total debt levels in the last twelve months, from US$91.64m to US$75.72m , which comprises of short- and long-term debt. With this reduction in debt, SGU’s cash and short-term investments stands at US$52.46m , ready to deploy into the business. Moreover, SGU has generated cash from operations of US$21.06m in the last twelve months, resulting in an operating cash to total debt ratio of 27.81%, meaning that SGU’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SGU’s case, it is able to generate 0.28x cash from its debt capital.
Does SGU’s liquid assets cover its short-term commitments?
Looking at SGU’s most recent US$272.33m liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.89x, which is below the prudent industry ratio of 3x.
Can SGU service its debt comfortably?
SGU is a relatively highly levered company with a debt-to-equity of 50.74%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SGU’s case, the ratio of 7.24x 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.
SGU’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 lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how SGU has been performing in the past. You should continue to research Star Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SGU’s future growth? Take a look at our free research report of analyst consensus for SGU’s outlook.
- Historical Performance: What has SGU’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.
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.