What You Must Know About Spotless Group Holdings Limited’s (ASX:SPO) Financial Strength

While small-cap stocks, such as Spotless Group Holdings Limited (ASX:SPO) with its market cap of AU$1.25B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since SPO is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into SPO here.

How does SPO’s operating cash flow stack up against its debt?

SPO’s debt level has been constant at around AU$848.30M over the previous year made up of current and long term debt. At this stable level of debt, SPO’s cash and short-term investments stands at AU$66.00M for investing into the business. Additionally, SPO has produced AU$190.60M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 22.47%, meaning that SPO’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses 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 AU$1.35B, it appears that the company is not able to meet these obligations given the level of current assets of AU$522.00M, with a current ratio of 0.39x below the prudent level of 3x.

ASX:SPO Historical Debt Apr 16th 18
ASX:SPO Historical Debt Apr 16th 18

Does SPO face the risk of succumbing to its debt-load?

With total debt exceeding equities, SPO is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since SPO is currently 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:

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, 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 SPO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Spotless Group Holdings to get a better picture of the stock by looking at: