Investors are always looking for growth in small-cap stocks like Public Joint-Stock Company Seligdar (MCX:SELG), with a market cap of RUруб7.31b. However, an important fact which most ignore is: how financially healthy is the business? 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. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into SELG here.
How much cash does SELG generate through its operations?
Over the past year, SELG has ramped up its debt from RUруб13.39b to RUруб15.27b – this includes both the current and long-term debt. With this rise in debt, SELG’s cash and short-term investments stands at RUруб606.9m for investing into the business. On top of this, SELG has produced RUруб2.93b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 19.2%, signalling that SELG’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SELG’s case, it is able to generate 0.19x cash from its debt capital.
Can SELG pay its short-term liabilities?
With current liabilities at RUруб15.89b, it seems that the business is not able to meet these obligations given the level of current assets of RUруб11.86b, with a current ratio of 0.75x below the prudent level of 3x.
Is SELG’s debt level acceptable?With debt reaching 80.2% of equity, SELG may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SELG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SELG’s, case, the ratio of 2.68x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
With a high level of debt on its balance sheet, SELG could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for SELG to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how SELG has been performing in the past. I suggest you continue to research Seligdar to get a more holistic view of the stock by looking at:
- Valuation: What is SELG 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 SELG is currently mispriced by the market.
- Historical Performance: What has SELG’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 firstname.lastname@example.org.