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Investors are always looking for growth in small-cap stocks like Superior Group of Companies, Inc. (NASDAQ:SGC), with a market cap of US$270m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, 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, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SGC here.
Does SGC produce enough cash relative to debt?
SGC has built up its total debt levels in the last twelve months, from US$39m to US$118m , which includes long-term debt. With this rise in debt, SGC currently has US$2.3m remaining in cash and short-term investments , ready to deploy into the business. On top of this, SGC has produced US$17m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 14%, meaning that SGC’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SGC’s case, it is able to generate 0.14x cash from its debt capital.
Can SGC pay its short-term liabilities?
With current liabilities at US$47m, it appears that the company has been able to meet these commitments with a current assets level of US$195m, leading to a 4.18x current account ratio. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can SGC service its debt comfortably?
SGC is a relatively highly levered company with a debt-to-equity of 78%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if SGC’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 SGC, the ratio of 11.8x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SGC ample headroom to grow its debt facilities.
SGC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around SGC’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how SGC has been performing in the past. I suggest you continue to research Superior Group of Companies to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SGC’s future growth? Take a look at our free research report of analyst consensus for SGC’s outlook.
- Historical Performance: What has SGC’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 past 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. For errors that warrant correction please contact the editor at email@example.com.