Is Salzgitter Aktiengesellschaft (FRA:SZG) A Financially Sound Company?
While small-cap stocks, such as Salzgitter Aktiengesellschaft (FRA:SZG) with its market cap of €1.5b, 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SZG here.
How much cash does SZG generate through its operations?
Over the past year, SZG has reduced its debt from €933m to €690m , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at €580m for investing into the business. Additionally, SZG has generated €436m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 63%, indicating that SZG’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SZG’s case, it is able to generate 0.63x cash from its debt capital.
Can SZG pay its short-term liabilities?
Looking at SZG’s €2.2b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.26x. Usually, for Metals and Mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is SZG’s debt level acceptable?
SZG’s level of debt is appropriate relative to its total equity, at 22%. SZG is not taking on too much debt commitment, which may be constraining for future growth. We can test if SZG’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 SZG, the ratio of 16.8x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SZG’s high interest coverage is seen as responsible and safe practice.
Next Steps:
SZG’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how SZG has been performing in the past. I suggest you continue to research Salzgitter to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SZG’s future growth? Take a look at our free research report of analyst consensus for SZG’s outlook.
Valuation: What is SZG 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 SZG 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 editorial-team@simplywallst.com.
