SPAR Group Inc (NASDAQ:SGRP) is a small-cap stock with a market capitalization of USD $23.46M. 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? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into SGRP here.
Does SGRP generate enough cash through operations?
SGRP’s debt levels surged from $8M to $12M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, SGRP currently has $7M remaining in cash and short-term investments for investing into the business. Moreover, SGRP has generated $1M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.11x, indicating that SGRP’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SGRP’s case, it is able to generate 0.11x cash from its debt capital.
Can SGRP meet its short-term obligations with the cash in hand?
With current liabilities at $32M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.33x. Usually, for media companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SGRP’s level of debt at an acceptable level?
SGRP’s level of debt is appropriate relative to its total equity, at 33.09%. This range is considered safe as SGRP is not taking on too much debt obligation, which may be constraining for future growth. We can test if SGRP’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 SGRP, the ratio of 22.37x suggests that interest is excessively covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Are you a shareholder? SGRP’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 will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may be different. I recommend researching market expectations for SGRP’s future growth on our free analysis platform.
Are you a potential investor? SGRP’s relatively safe debt levels is even more impressive due to its ability to generate high cash flow, which illustrates operating efficiency. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. To gain more conviction in the stock, you need to further examine SGRP’s track record. I encourage you to continue your research by taking a look at SGRP’s past performance analysis on our free platform to figure out SGRP’s financial health position.
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.