How Financially Strong Is Supply Network Limited (ASX:SNL)?

Investors are always looking for growth in small-cap stocks like Supply Network Limited (ASX:SNL), with a market cap of AU$128.40M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, 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, I know these factors are very high-level, so I suggest you dig deeper yourself into SNL here.

Does SNL generate an acceptable amount of cash through operations?

SNL's debt level has been constant at around AU$3.47M over the previous year comprising of short- and long-term debt. At this current level of debt, SNL's cash and short-term investments stands at AU$3.22M , ready to deploy into the business. On top of this, SNL has produced AU$5.53M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 159.10%, indicating that SNL’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SNL’s case, it is able to generate 1.59x cash from its debt capital.

Does SNL’s liquid assets cover its short-term commitments?

With current liabilities at AU$18.36M, it appears that the company has been able to meet these obligations given the level of current assets of AU$46.41M, with a current ratio of 2.53x. For Retail Distributors companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too capital in low return investments.

Can SNL service its debt comfortably?

SNL’s level of debt is low relative to its total equity, at 9.97%. SNL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether SNL 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 SNL's, case, the ratio of 54.66x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

SNL’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how SNL has been performing in the past. I recommend you continue to research Supply Network to get a more holistic view of the stock by looking at:

• 1. Valuation: What is SNL 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 SNL is currently mispriced by the market.
• 2. Historical Performance: What has SNL'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.
• 3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.