While small-cap stocks, such as Spire Inc. (NYSE:SR) with its market cap of US$4.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, these checks don’t give you a full picture, so I suggest you dig deeper yourself into SR here.
Does SR Produce Much Cash Relative To Its Debt?
Over the past year, SR has maintained its debt levels at around US$2.8b which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$8.4m , ready to be used for running the business. Moreover, SR has produced cash from operations of US$509m during the same period of time, resulting in an operating cash to total debt ratio of 18%, meaning that SR’s operating cash is less than its debt.
Can SR pay its short-term liabilities?
At the current liabilities level of US$1.6b, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$905m, with a current ratio of 0.58x. The current ratio is the number you get when you divide current assets by current liabilities.
Is SR’s debt level acceptable?
With total debt exceeding equity, SR is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SR’s case, the ratio of 2.83x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
SR’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how SR has been performing in the past. You should continue to research Spire to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SR’s future growth? Take a look at our free research report of analyst consensus for SR’s outlook.
- Historical Performance: What has SR’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.
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