Investors are always looking for growth in small-cap stocks like SpartanNash Company (NASDAQ:SPTN), with a market cap of US$757m. However, an important fact which most ignore is: how financially healthy is the business? Consumer Retailing businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SPTN here.
How much cash does SPTN generate through its operations?
SPTN has sustained its debt level by about US$703m over the last 12 months including long-term debt. At this current level of debt, SPTN currently has US$21m remaining in cash and short-term investments , ready to deploy into the business. Additionally, SPTN has generated US$124m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 18%, indicating that SPTN’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SPTN’s case, it is able to generate 0.18x cash from its debt capital.
Can SPTN meet its short-term obligations with the cash in hand?
At the current liabilities level of US$518m, it appears that the company has been able to meet these commitments with a current assets level of US$1.0b, leading to a 1.99x current account ratio. Generally, for Consumer Retailing companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SPTN’s debt level acceptable?
With a debt-to-equity ratio of 95%, SPTN can be considered as an above-average leveraged 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 test if SPTN’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 SPTN, the ratio of 3.92x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SPTN’s high interest coverage is seen as responsible and safe practice.
Although SPTN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around SPTN’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 SPTN has been performing in the past. You should continue to research SpartanNash to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SPTN’s future growth? Take a look at our free research report of analyst consensus for SPTN’s outlook.
- Valuation: What is SPTN 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 SPTN 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.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.