Is Satellite Solutions Worldwide Group plc (AIM:SAT) A Financially Sound Company?
While small-cap stocks, such as Satellite Solutions Worldwide Group plc (AIM:SAT) with its market cap of GBP £51.20M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for SAT
Does SAT generate enough cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These adverse events bring devastation and yet does not absolve the company from its debt. Can SAT pay off what it owes to its debtholder by using only cash from its operational activities? In the case of SAT, operating cash flow turned out to be 0.06x its debt level over the past twelve months. This means what SAT can generate on an annual basis only covers less than a tenth of what it actually owes its debtors in the near term, which raises a red flag.
Does SAT’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, SAT may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that SAT is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Is SAT’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. SAT’s debt-to-equity ratio exceeds 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations.
Next Steps:
Are you a shareholder? With a high level of debt on its balance sheet, SAT could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for SAT to increase its operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. In the future, SAT’s financial situation may change. I recommend researching market expectations for SAT’s future growth on our free analysis platform.
Are you a potential investor? SAT’s large debt ratio along with poor cash coverage in addition to low liquidity coverage of short-term obligations may not be what you’re after in an investment. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of SAT’s track record. I encourage you to continue your research by taking a look at SAT’s past performance analysis on our free platform to conclude on SAT’s financial health.
To help readers see pass 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.
