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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Spark New Zealand Limited (NZSE:SPK), with a market cap of NZ$7.3b, often get neglected by retail investors. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at SPK’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Spark New Zealand’s financial health, so you should conduct further analysis into SPK here.
Does SPK Produce Much Cash Relative To Its Debt?
SPK has built up its total debt levels in the last twelve months, from NZ$1.3b to NZ$1.9b – this includes long-term debt. With this rise in debt, SPK currently has NZ$110m remaining in cash and short-term investments , ready to be used for running the business. Additionally, SPK has generated NZ$744m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 39%, meaning that SPK’s current level of operating cash is high enough to cover debt.
Does SPK’s liquid assets cover its short-term commitments?
At the current liabilities level of NZ$980m, the company may not be able to easily meet these obligations given the level of current assets of NZ$918m, with a current ratio of 0.94x. The current ratio is calculated by dividing current assets by current liabilities.
Does SPK face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 99%, SPK can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 SPK's case, the ratio of 10.84x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SPK ample headroom to grow its debt facilities.
Although SPK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I'm sure SPK has company-specific issues impacting its capital structure decisions. You should continue to research Spark New Zealand to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SPK’s future growth? Take a look at our free research report of analyst consensus for SPK’s outlook.
- Valuation: What is SPK 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 SPK 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.