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Investors are always looking for growth in small-cap stocks like Superior Plus Corp. (TSE:SPB), with a market cap of CA$2.3b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, 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, this is not a comprehensive overview, so I recommend you dig deeper yourself into SPB here.
Does SPB Produce Much Cash Relative To Its Debt?
SPB has built up its total debt levels in the last twelve months, from CA$1.0b to CA$1.9b , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CA$23m , ready to be used for running the business. On top of this, SPB has generated cash from operations of CA$315m during the same period of time, resulting in an operating cash to total debt ratio of 16%, signalling that SPB’s current level of operating cash is not high enough to cover debt.
Does SPB’s liquid assets cover its short-term commitments?
With current liabilities at CA$425m, it appears that the company has been able to meet these obligations given the level of current assets of CA$567m, with a current ratio of 1.33x. The current ratio is calculated by dividing current assets by current liabilities. For Gas Utilities companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can SPB service its debt comfortably?
SPB is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SPB's case, the ratio of 2.64x 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.
SPB’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 SPB's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure SPB has company-specific issues impacting its capital structure decisions. I recommend you continue to research Superior Plus to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SPB’s future growth? Take a look at our free research report of analyst consensus for SPB’s outlook.
- Valuation: What is SPB 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 SPB 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.