S&W Seed Company (NASDAQ:SANW) is a small-cap stock with a market capitalization of US$90m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that SANW is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into SANW here.
Does SANW Produce Much Cash Relative To Its Debt?
SANW’s debt levels surged from US$41m to US$60m over the last 12 months , which accounts for long term debt. With this growth in debt, SANW’s cash and short-term investments stands at US$2.5m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn’t be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of SANW’s operating efficiency ratios such as ROA here.
Does SANW’s liquid assets cover its short-term commitments?
Looking at SANW’s US$85m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$128m, with a current ratio of 1.51x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does SANW face the risk of succumbing to its debt-load?
SANW is a relatively highly levered company with a debt-to-equity of 56%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since SANW is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
SANW’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how SANW has been performing in the past. I suggest you continue to research S&W Seed to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SANW’s future growth? Take a look at our free research report of analyst consensus for SANW’s outlook.
- Valuation: What is SANW 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 SANW 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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