SRG Limited (ASX:SRG), with a market capitalization of USD $68 Million, is considered a small-cap company. Although such businesses are the ones which could grow the most, they are also highly prone to a downturn in the country’s economy or even a specific region. It’s low debt-to-equity ratio of 5.7% does make it look financially sound, but we must also check how its cash flows and earnings stand against its debt.
One of the major reasons that they are highly affected by a downturn in the country’s economy or an industry in the region is the lack of geographic diversification. So, investors often choose small-cap funds. While savvy investors aren’t wrong in looking for singular blockbuster opportunities and trying to achieve diversification on their own by allocating a small part of their portfolio capital to small-caps, that doesn’t make these investments less risky individually. However, to help you reduce that risk, I’m going to provide you with few basic aspects other than debt-to-equity ratio to gauge a ballpark estimate on how financially strong is the company. View our latest analysis for SRG
Has SRG got enough cash to weather a storm?
Despite low debt, for SRG to continue operations during a downturn, it needs a sound liquidity position. When evaluating financial strength, I compare a company’s current assets (cash and liquid assets) to its total debt. SRG’s current assets of $83 Million cover the company’s total debt of $5 Million, indicating that the company is in a sound position to pay-down its debt when needed or favourable.
Are SRG’s earnings squeezed by its debt-obligations?
Companies invest substantially in acquiring assets. Non-cash expenses such as depreciation and amortization represent ongoing expenses and losses on that front. Thus, it makes the company’s net income an important metric to decide whether the firm is generating economic profits. If earnings measure up strongly against the debt, it’s a sign of financial strength.A 5x multiple of earnings to interest expense is what I consider to be a benchmark for a financially strong company. In SRG’s case, the interest on debt is well covered by earnings (36.3x coverage).
SRG doesn’t just sport a low-debt profile, its earnings and operating cash flows make it strong enough to get through difficult times or capitalize on attractive growth opportunities during good times. Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on SRG to see what are SRG’s growth prospects and whether it could be considered an undervalued opportunity.
PS. If you are not interested in SRG anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.