While small-cap stocks, such as SSP Group plc (LON:SSPG) with its market cap of UK£3.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into SSPG here.
Does SSPG Produce Much Cash Relative To Its Debt?
Over the past year, SSPG has ramped up its debt from UK£460m to UK£491m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at UK£148m to keep the business going. Additionally, SSPG has produced cash from operations of UK£273m during the same period of time, resulting in an operating cash to total debt ratio of 56%, meaning that SSPG’s debt is appropriately covered by operating cash.
Can SSPG pay its short-term liabilities?
Looking at SSPG’s UK£581m in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of UK£363m, leading to a current ratio of 0.63x. The current ratio is calculated by dividing current assets by current liabilities.
Does SSPG face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, SSPG is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SSPG's case, the ratio of 25.73x suggests that interest is comfortably 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.
Although SSPG’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. But, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for SSPG's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research SSP Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SSPG’s future growth? Take a look at our free research report of analyst consensus for SSPG’s outlook.
- Valuation: What is SSPG 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 SSPG 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.
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