Investors are always looking for growth in small-cap stocks like Sanford Limited (NZSE:SAN), with a market cap of NZ$785.45M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into SAN here.
Does SAN generate an acceptable amount of cash through operations?
SAN has built up its total debt levels in the last twelve months, from NZ$177.5M to NZ$186.6M , which is made up of current and long term debt. With this rise in debt, SAN’s cash and short-term investments stands at NZ$5.2M for investing into the business. Moreover, SAN has generated NZ$50.3M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 26.95%, meaning that SAN’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SAN’s case, it is able to generate 0.27x cash from its debt capital.
Can SAN meet its short-term obligations with the cash in hand?
With current liabilities at NZ$123.7M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.22x. Generally, for food companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can SAN service its debt comfortably?
SAN’s level of debt is appropriate relative to its total equity, at 32.40%. This range is considered safe as SAN is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether SAN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In SAN’s, case, the ratio of 7x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Are you a shareholder? SAN’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may be different. I recommend researching market expectations for SAN’s future growth on our free analysis platform.