Ship Finance International Limited (NYSE:SFL): Time For A Financial Health Check
Ship Finance International Limited (NYSE:SFL) is a small-cap stock with a market capitalization of US$1.56b. 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? Assessing first and foremost the financial health is essential, 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. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SFL here.
How much cash does SFL generate through its operations?
SFL’s debt level has been constant at around US$1.79b over the previous year comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$246.96m , ready to deploy into the business. Additionally, SFL has generated cash from operations of US$177.80m over the same time period, leading to an operating cash to total debt ratio of 9.92%, meaning that SFL’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SFL’s case, it is able to generate 0.099x cash from its debt capital.
Can SFL pay its short-term liabilities?
With current liabilities at US$343.75m, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.92x, which is below the prudent industry ratio of 3x.
Does SFL face the risk of succumbing to its debt-load?
With total debt exceeding equities, SFL is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SFL’s case, the ratio of 2.17x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SFL’s low interest coverage already puts the company at higher risk of default.
Next Steps:
SFL’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for SFL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Ship Finance International to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SFL’s future growth? Take a look at our free research report of analyst consensus for SFL’s outlook.
Valuation: What is SFL 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 SFL 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 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.
