How Financially Strong Is Swiss Water Decaffeinated Coffee Inc. (TSE:SWP)?

Swiss Water Decaffeinated Coffee Inc. (TSE:SWP) is a small-cap stock with a market capitalization of CA$45m. 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? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into SWP here.

Does SWP produce enough cash relative to debt?

SWP has built up its total debt levels in the last twelve months, from CA$12m to CA$16m – this includes long-term debt. With this rise in debt, SWP currently has CA$7.4m remaining in cash and short-term investments , ready to deploy into the business. Moreover, SWP has generated CA$1.8m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 11%, signalling that SWP’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SWP’s case, it is able to generate 0.11x cash from its debt capital.

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

With current liabilities at CA$7.4m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.86x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

TSX:SWP Historical Debt January 1st 19
TSX:SWP Historical Debt January 1st 19

Is SWP’s debt level acceptable?

With a debt-to-equity ratio of 34%, SWP’s debt level may be seen as prudent. SWP is not taking on too much debt commitment, which may be constraining for future growth. We can test if SWP’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 SWP, the ratio of 5.58x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SWP’s high interest coverage is seen as responsible and safe practice.

Next Steps:

SWP’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. I admit this is a fairly basic analysis for SWP’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Swiss Water Decaffeinated Coffee to get a better picture of the stock by looking at:

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

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.