While small-cap stocks, such as Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS) with its market cap of US$52m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Specialty Retail businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into SHOS here.
How much cash does SHOS generate through its operations?
SHOS’s debt levels surged from US$112m to US$135m over the last 12 months , which accounts for long term debt. With this rise in debt, SHOS’s cash and short-term investments stands at US$14m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of SHOS’s operating efficiency ratios such as ROA here.
Can SHOS pay its short-term liabilities?
With current liabilities at US$189m, it appears that the company has been able to meet these obligations given the level of current assets of US$345m, with a current ratio of 1.83x. For Specialty Retail 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.
Does SHOS face the risk of succumbing to its debt-load?
With debt reaching 87% of equity, SHOS may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since SHOS is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although SHOS’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure SHOS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Sears Hometown and Outlet Stores to get a more holistic view of the small-cap by looking at:
- Valuation: What is SHOS 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 SHOS is currently mispriced by the market.
- Historical Performance: What has SHOS’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.