What does Spotless Group Holdings Limited’s (ASX:SPO) Balance Sheet Tell Us Abouts Its Future?

Investors are always looking for growth in small-cap stocks like Spotless Group Holdings Limited (ASX:SPO), with a market cap of A$1.27B. However, an important fact which most ignore is: how financially healthy is the business? Since SPO is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. 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’d encourage you to dig deeper yourself into SPO here.

Does SPO generate an acceptable amount of cash through operations?

SPO’s debt level has been constant at around A$848.3M over the previous year – this includes both the current and long-term debt. At this constant level of debt, SPO currently has A$66.0M remaining in cash and short-term investments , ready to deploy into the business. Additionally, SPO has generated cash from operations of A$190.6M in the last twelve months, leading to an operating cash to total debt ratio of 22.47%, indicating that SPO’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In SPO’s case, it is able to generate 0.22x cash from its debt capital.

Can SPO meet its short-term obligations with the cash in hand?

With current liabilities at A$1,346.5M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.39x, which is below the prudent industry ratio of 3x.

ASX:SPO Historical Debt Jan 1st 18
ASX:SPO Historical Debt Jan 1st 18

Can SPO service its debt comfortably?

Since total debt levels have outpaced equities, SPO is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since SPO is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Are you a shareholder? SPO’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, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may change. I recommend keeping on top of market expectations for SPO’s future growth on our free analysis platform.

Are you a potential investor? SPO’s high debt levels along with poor cash coverage in addition to low liquidity coverage of near-term obligations may scare some investors away intially. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of SPO’s track record. I encourage you to continue your research by taking a look at SPO’s past performance analysis on our free platform to figure out SPO’s financial health position.