Investors are always looking for growth in small-cap stocks like Sky Solar Holdings Ltd (NASDAQ:SKYS), with a market cap of US$67.65M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into SKYS here.
How does SKYS’s operating cash flow stack up against its debt?
SKYS’s debt levels surged from US$104.46M to US$164.28M over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, SKYS’s cash and short-term investments stands at US$12.67M for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of SKYS’s operating efficiency ratios such as ROA here.
Can SKYS pay its short-term liabilities?
At the current liabilities level of US$69.11M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$166.17M, with a current ratio of 2.4x. For Renewable Energy companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can SKYS service its debt comfortably?
Since total debt levels have outpaced equities, SKYS is a highly leveraged 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 SKYS’s case, the ratio of 0.29x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
SKYS’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, 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 SKYS has been performing in the past. I recommend you continue to research Sky Solar Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SKYS’s future growth? Take a look at our free research report of analyst consensus for SKYS’s outlook.
- Historical Performance: What has SKYS’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.