How Financially Strong Is Synlait Milk Limited (NZSE:SML)?

While small-cap stocks, such as Synlait Milk Limited (NZSE:SML) with its market cap of NZ$2.06b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into SML here.

How does SML’s operating cash flow stack up against its debt?

SML’s debt levels have fallen from NZ$149.88m to NZ$138.61m over the last 12 months , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at NZ$88.88m for investing into the business. Additionally, SML has produced cash from operations of NZ$204.33m during the same period of time, resulting in an operating cash to total debt ratio of 147.41%, meaning that SML’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SML’s case, it is able to generate 1.47x cash from its debt capital.

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

With current liabilities at NZ$292.34m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.14x. Generally, for Food companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

NZSE:SML Historical Debt June 29th 18
NZSE:SML Historical Debt June 29th 18

Is SML’s debt level acceptable?

With a debt-to-equity ratio of 31.88%, SML’s debt level may be seen as prudent. SML is not taking on too much debt commitment, which may be constraining for future growth. We can test if SML’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 SML, the ratio of 11.96x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SML’s high interest coverage is seen as responsible and safe practice.

Next Steps:

SML’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 SML has company-specific issues impacting its capital structure decisions. You should continue to research Synlait Milk to get a better picture of the stock by looking at:

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