What does Superloop Limited's (ASX:SLC) Balance Sheet Tell Us About Its Future?

Superloop Limited (ASX:SLC) is a small-cap stock with a market capitalization of AU$543.83m. 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? Telecom businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. So, understanding the company's financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into SLC here.

How much cash does SLC generate through its operations?

SLC has built up its total debt levels in the last twelve months, from AU$29.66m to AU$62.78m , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$15.44m , ready to deploy into the business. On top of this, SLC has generated AU$37.94m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 60.44%, signalling 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.

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

At the current liabilities level of AU$41.51m liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.85x, which is below the prudent industry ratio of 3x.

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

SLC’s level of debt is appropriate relative to its total equity, at 16.13%. SLC is not taking on too much debt commitment, which may be constraining for future growth. 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 lenders may be less hesitant to lend out more funding as SLC’s high interest coverage is seen as responsible and safe practice.

Next Steps:

SLC has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But it is still important for shareholders to understand why the company isn't increasing its cheaper cost of capital to fund future growth, especially when liquidity may also be an issue. I admit this is a fairly basic analysis for SLC's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Superloop to get a more holistic view of the stock by looking at:

1. 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.
2. 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.
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.

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 editorial-team@simplywallst.com.

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.