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Select Interior Concepts, Inc. (NASDAQ:SIC) is a small-cap stock with a market capitalization of US$261m. 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? Given that SIC is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, these checks don’t give you a full picture, so I recommend you dig deeper yourself into SIC here.
SIC’s Debt (And Cash Flows)
SIC has built up its total debt levels in the last twelve months, from US$127m to US$187m , which includes long-term debt. With this increase in debt, SIC currently has US$7.1m remaining in cash and short-term investments to keep the business going. Moreover, SIC has generated US$24m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 13%, meaning that SIC’s debt is not covered by operating cash.
Can SIC pay its short-term liabilities?
With current liabilities at US$79m, it seems that the business has been able to meet these obligations given the level of current assets of US$185m, with a current ratio of 2.35x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Consumer Services companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does SIC face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, SIC is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since SIC is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although SIC’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 SIC’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SIC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Select Interior Concepts to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SIC’s future growth? Take a look at our free research report of analyst consensus for SIC’s outlook.
- Valuation: What is SIC 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 SIC 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.