ScandBook Holding AB (publ) (STO:SBOK) is a small-cap stock with a market capitalization of kr56m. 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 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. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SBOK here.
How much cash does SBOK generate through its operations?
SBOK has shrunken its total debt levels in the last twelve months, from kr95m to kr79m – this includes long-term debt. With this reduction in debt, SBOK currently has kr2.2m remaining in cash and short-term investments , ready to deploy into the business. Additionally, SBOK has produced kr9.4m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 12%, indicating that SBOK’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SBOK’s case, it is able to generate 0.12x cash from its debt capital.
Can SBOK pay its short-term liabilities?
At the current liabilities level of kr61m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.61x. For Commercial Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can SBOK service its debt comfortably?
SBOK is a relatively highly levered company with a debt-to-equity of 48%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SBOK 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 SBOK’s, case, the ratio of 2.61x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Although SBOK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around SBOK’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure SBOK has company-specific issues impacting its capital structure decisions. You should continue to research ScandBook Holding to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SBOK’s future growth? Take a look at our free research report of analyst consensus for SBOK’s outlook.
- Valuation: What is SBOK 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 SBOK is currently mispriced by the market.
- 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 firstname.lastname@example.org.