S&W Seed Company (NASDAQ:SANW) is a small-cap stock with a market capitalization of US$98m. 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? Since SANW is loss-making right now, it’s crucial to assess 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. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into SANW here.
Does SANW Produce Much Cash Relative To Its Debt?
Over the past year, SANW has ramped up its debt from US$41m to US$60m , which accounts for long term debt. With this growth in debt, SANW currently has US$2.5m remaining in cash and short-term investments to keep the business going. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of SANW’s operating efficiency ratios such as ROA here.
Can SANW pay its short-term liabilities?
Looking at SANW’s US$85m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.51x. The current ratio is the number you get when you divide current assets by current liabilities. For Food companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is SANW’s debt level acceptable?
With debt reaching 56% of equity, SANW may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since SANW is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although SANW’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 SANW’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SANW’s financial health. Other important fundamentals need to be considered alongside. You should continue to research S&W Seed to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SANW’s future growth? Take a look at our free research report of analyst consensus for SANW’s outlook.
- Valuation: What is SANW 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 SANW 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.
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