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What You Should Know About Spark New Zealand Limited's (NZSE:SPK) Financial Strength

Simply Wall St

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While small-cap stocks, such as Spark New Zealand Limited (NZSE:SPK) with its market cap of NZ$7.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into SPK here.

Does SPK Produce Much Cash Relative To Its Debt?

SPK's debt levels surged from NZ$1.3b to NZ$1.9b over the last 12 months – this includes long-term debt. With this growth in debt, SPK currently has NZ$110m remaining in cash and short-term investments to keep the business going. On top of this, SPK has generated NZ$744m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 39%, signalling that SPK’s current level of operating cash is high enough to cover debt.

Does SPK’s liquid assets cover its short-term commitments?

At the current liabilities level of NZ$980m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.94x. The current ratio is the number you get when you divide current assets by current liabilities.

NZSE:SPK Historical Debt, June 22nd 2019

Is SPK’s debt level acceptable?

SPK is a relatively highly levered company with a debt-to-equity of 99%. 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 SPK’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 SPK, the ratio of 10.84x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SPK ample headroom to grow its debt facilities.

Next Steps:

Although SPK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how SPK has been performing in the past. You should continue to research Spark New Zealand to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SPK’s future growth? Take a look at our free research report of analyst consensus for SPK’s outlook.
  2. Valuation: What is SPK 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 SPK is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com. 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.