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Is Shawcor Ltd.’s (TSE:SCL) Balance Sheet A Threat To Its Future?

Shawcor Ltd. (TSE:SCL) is a small-cap stock with a market capitalization of CA$1.3b. 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? Energy Services companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into SCL here.

Does SCL produce enough cash relative to debt?

SCL has sustained its debt level by about CA$265m over the last 12 months – this includes long-term debt. At this stable level of debt, SCL’s cash and short-term investments stands at CA$190m for investing into the business. Moreover, SCL has produced CA$76m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 28%, signalling that SCL’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SCL’s case, it is able to generate 0.28x cash from its debt capital.

Can SCL meet its short-term obligations with the cash in hand?

With current liabilities at CA$297m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.29x. Generally, for Energy Services companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

TSX:SCL Historical Debt January 18th 19
TSX:SCL Historical Debt January 18th 19

Does SCL face the risk of succumbing to its debt-load?

With debt at 26% of equity, SCL may be thought of as appropriately levered. This range is considered safe as SCL is not taking on too much debt obligation, which may be constraining for future growth. We can test if SCL’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 SCL, the ratio of 6.27x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SCL’s high interest coverage is seen as responsible and safe practice.

Next Steps:

SCL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. 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 SCL has been performing in the past. I recommend you continue to research Shawcor to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SCL’s future growth? Take a look at our free research report of analyst consensus for SCL’s outlook.

  2. Valuation: What is SCL 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 SCL 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.

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.

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