While small-cap stocks, such as Suburban Propane Partners LP (NYSE:SPH) with its market cap of US$1.44b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into SPH here.
How does SPH’s operating cash flow stack up against its debt?
Over the past year, SPH has maintained its debt levels at around US$1.27b made up of current and long term debt. At this stable level of debt, SPH currently has US$2.79m remaining in cash and short-term investments , ready to deploy into the business. Additionally, SPH has produced cash from operations of US$160.36m in the last twelve months, leading to an operating cash to total debt ratio of 12.61%, signalling that SPH’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SPH’s case, it is able to generate 0.13x cash from its debt capital.
Can SPH meet its short-term obligations with the cash in hand?
At the current liabilities level of US$210.37m liabilities, it appears that the company has not been able to meet these commitments with a current assets level of US$139.49m, leading to a 0.66x current account ratio. which is under the appropriate industry ratio of 3x.
Can SPH service its debt comfortably?SPH is a highly-leveraged company with debt exceeding equity by over 100%. 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 SPH’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 SPH, the ratio of 1.87x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
SPH’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure SPH has company-specific issues impacting its capital structure decisions. I recommend you continue to research Suburban Propane Partners to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SPH’s future growth? Take a look at our free research report of analyst consensus for SPH’s outlook.
- Valuation: What is SPH 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 SPH 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.