Investors are always looking for growth in small-cap stocks like Superloop Limited (ASX:SLC), with a market cap of AU$341m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Telecom industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into SLC here.
How does SLC’s operating cash flow stack up against its debt?
Over the past year, SLC has ramped up its debt from AU$30m to AU$63m – this includes long-term debt. With this rise in debt, SLC currently has AU$16m remaining in cash and short-term investments for investing into the business. Additionally, SLC has produced cash from operations of AU$38m over the same time period, resulting in an operating cash to total debt ratio of 60%, indicating that SLC’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SLC’s case, it is able to generate 0.6x cash from its debt capital.
Can SLC meet its short-term obligations with the cash in hand?
With current liabilities at AU$42m, it appears that the company may not be able to easily meet these obligations given the level of current assets of AU$35m, with a current ratio of 0.85x.
Can SLC service its debt comfortably?
With a debt-to-equity ratio of 16%, SLC’s debt level may be seen as prudent. SLC is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if SLC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SLC, the ratio of 3.79x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SLC ample headroom to grow its debt facilities.
SLC’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, as shareholders, you should try and determine whether this level of debt is justified for SLC, especially if meeting short-term obligations could also bring about issues. Keep in mind I haven’t considered other factors such as how SLC has been performing in the past. I recommend you continue to research Superloop to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SLC’s future growth? Take a look at our free research report of analyst consensus for SLC’s outlook.
- Valuation: What is SLC 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 SLC is currently mispriced by the market.
- 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 email@example.com.