SSM Holding AB (publ) (STO:SSM) is a small-cap stock with a market capitalization of kr484m. 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? Companies operating in the Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. 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 recommend you dig deeper yourself into SSM here.
How does SSM’s operating cash flow stack up against its debt?
SSM’s debt levels have fallen from kr555m to kr492m over the last 12 months – this includes both the current and long-term debt. With this debt repayment, SSM currently has kr373m remaining in cash and short-term investments for investing into the business. On top of this, SSM has generated cash from operations of kr62m in the last twelve months, leading to an operating cash to total debt ratio of 13%, indicating that SSM’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SSM’s case, it is able to generate 0.13x cash from its debt capital.
Can SSM pay its short-term liabilities?
With current liabilities at kr95m, it appears that the company has been able to meet these obligations given the level of current assets of kr1.0b, with a current ratio of 10.69x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue SSM could be holding too much capital in a low-return investment environment.
Does SSM face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 51%, SSM 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 SSM’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 SSM, the ratio of 4.06x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SSM’s high interest coverage is seen as responsible and safe practice.
SSM’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for SSM’s financial health. Other important fundamentals need to be considered alongside. You should continue to research SSM Holding to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SSM’s future growth? Take a look at our free research report of analyst consensus for SSM’s outlook.
- Valuation: What is SSM 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 SSM 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 email@example.com.