Slater and Gordon Limited (ASX:SGH) is a small-cap stock with a market capitalization of AU$152.96m. 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? Given that SGH is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into SGH here.
How much cash does SGH generate through its operations?
SGH has sustained its debt level by about AU$782.36m over the last 12 months comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at AU$33.30m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of SGH’s operating efficiency ratios such as ROA here.
Does SGH’s liquid assets cover its short-term commitments?
Looking at SGH’s most recent AU$949.46m liabilities, the company is not able to meet these obligations given the level of current assets of AU$744.79m, with a current ratio of 0.78x below the prudent level of 3x.
Can SGH service its debt comfortably?Since total debt levels have outpaced equities, SGH is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since SGH is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
SGH’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure SGH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Slater and Gordon to get a better picture of the stock by looking at:
- Valuation: What is SGH 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 SGH is currently mispriced by the market.
- Historical Performance: What has SGH’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.