While small-cap stocks, such as Stadium Group plc (LON:SDM) with its market cap of UK£46.20m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Electronic companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. 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 SDM here.
How much cash does SDM generate through its operations?
SDM has built up its total debt levels in the last twelve months, from UK£7.88m to UK£13.61m , which is made up of current and long term debt. With this growth in debt, SDM currently has UK£1.70m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of SDM’s operating efficiency ratios such as ROA here.
Does SDM’s liquid assets cover its short-term commitments?
Looking at SDM’s most recent UK£21.29m liabilities, the company has been able to meet these commitments with a current assets level of UK£31.13m, leading to a 1.46x current account ratio. Generally, for Electronic companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SDM’s debt level acceptable?With a debt-to-equity ratio of 60.60%, SDM can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if SDM’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 SDM, the ratio of 14.19x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SDM’s high interest coverage is seen as responsible and safe practice.
SDM’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for SDM’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Stadium Group to get a more holistic view of the stock by looking at:
- Historical Performance: What has SDM’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.
- 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.