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While small-cap stocks, such as Superior Plus Corp. (TSE:SPB) with its market cap of CA$2.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, 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. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into SPB here.
SPB’s Debt (And Cash Flows)
SPB has built up its total debt levels in the last twelve months, from CA$1.0b to CA$1.9b , which includes long-term debt. With this increase in debt, SPB's cash and short-term investments stands at CA$23m to keep the business going. Moreover, SPB has generated cash from operations of CA$315m during the same period of time, resulting in an operating cash to total debt ratio of 16%, indicating that SPB’s operating cash is less than its debt.
Does SPB’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$425m, the company has been able to meet these commitments with a current assets level of CA$567m, leading to a 1.33x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Gas Utilities companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can SPB service its debt comfortably?
Since total debt levels exceed equity, SPB is a highly leveraged company. 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 test if SPB’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 SPB, the ratio of 2.64x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SPB’s low interest coverage already puts the company at higher risk of default.
SPB’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. Since there is also no concerns around SPB's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how SPB has been performing in the past. You should continue to research Superior Plus to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SPB’s future growth? Take a look at our free research report of analyst consensus for SPB’s outlook.
- Valuation: What is SPB 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 SPB 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.
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.