What Does Spirit Telecom Limited's (ASX:ST1) Balance Sheet Tell Us About It?

Investors are always looking for growth in small-cap stocks like Spirit Telecom Limited (ASX:ST1), with a market cap of AU$25m. However, an important fact which most ignore is: how financially healthy is the business? Since ST1 is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into ST1 here.

ST1’s Debt (And Cash Flows)

Over the past year, ST1 has reduced its debt from AU$5.7m to AU$4.5m , which includes long-term debt. With this reduction in debt, ST1's cash and short-term investments stands at AU$3.0m to keep the business going. Additionally, ST1 has generated AU$1.4m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 31%, meaning that ST1’s operating cash is sufficient to cover its debt.

Does ST1’s liquid assets cover its short-term commitments?

With current liabilities at AU$3.0m, the company has been able to meet these commitments with a current assets level of AU$4.8m, leading to a 1.61x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Telecom companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is ST1’s debt level acceptable?

With debt at 30% of equity, ST1 may be thought of as appropriately levered. ST1 is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for ST1, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

ST1’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I'm sure ST1 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Spirit Telecom to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for ST1’s future growth? Take a look at our free research report of analyst consensus for ST1’s outlook.
2. Historical Performance: What has ST1'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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.