Is Skellerup Holdings Limited's (NZSE:SKL) Balance Sheet Strong Enough To Weather A Storm?

Skellerup Holdings Limited (NZSE:SKL) is a small-cap stock with a market capitalization of NZ$381.76m. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SKL here.

How much cash does SKL generate through its operations?

SKL's debt levels surged from NZ$36.59m to NZ$41.92m over the last 12 months , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at NZ$6.02m for investing into the business. Additionally, SKL has produced cash from operations of NZ$21.23m over the same time period, leading to an operating cash to total debt ratio of 50.65%, indicating that SKL’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SKL’s case, it is able to generate 0.51x cash from its debt capital.

Can SKL meet its short-term obligations with the cash in hand?

At the current liabilities level of NZ$33.42m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.83x. Usually, for Machinery companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can SKL service its debt comfortably?

With debt at 27.61% of equity, SKL may be thought of as appropriately levered. SKL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether SKL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SKL's, case, the ratio of 24.59x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SKL ample headroom to grow its debt facilities.

Next Steps:

SKL’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure SKL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Skellerup Holdings to get a more holistic view of the stock by looking at:

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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.