Are Synlait Milk Limited’s (NZE:SML) Interest Costs Too High?
Synlait Milk Limited (NZSE:SML) is a small-cap stock with a market capitalization of NZ$1.77B. 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? 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into SML here.
How does SML’s operating cash flow stack up against its debt?
SML has shrunken its total debt levels in the last twelve months, from NZ$215.45M to NZ$156.09M , which is made up of current and long term debt. With this debt payback, SML currently has NZ$73.83M remaining in cash and short-term investments for investing into the business. On top of this, SML has generated NZ$115.18M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 73.79%, signalling that SML’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SML’s case, it is able to generate 0.74x cash from its debt capital.
Can SML meet its short-term obligations with the cash in hand?
With current liabilities at NZ$232.33M, the company has been able to meet these commitments with a current assets level of NZ$258.49M, leading to a 1.11x current account ratio. Generally, for Food companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does SML face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 31.88%, SML’s debt level may be seen as prudent. This range is considered safe as SML is not taking on too much debt obligation, which may be constraining for future growth. We can test if SML’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 SML, the ratio of 11.96x 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.
Next Steps:
SML has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how SML has been performing in the past. I suggest you continue to research Synlait Milk to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SML’s future growth? Take a look at our free research report of analyst consensus for SML’s outlook.
Valuation: What is SML 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 SML 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.
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.
