What You Should Know About Svedbergs i Dalstorp AB's (STO:SVED B) Financial Strength

Simply Wall St

Sat, May 4, 2019, 1:12 AM

While small-cap stocks, such as Svedbergs i Dalstorp AB (STO:SVED B) with its market cap of kr506m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes vital, as mismanagement of capital can lead to 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. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into SVED B here.

SVED B’s Debt (And Cash Flows)

SVED B has built up its total debt levels in the last twelve months, from kr196m to kr238m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at kr33m , ready to be used for running the business. On top of this, SVED B has generated cash from operations of kr54m in the last twelve months, leading to an operating cash to total debt ratio of 23%, meaning that SVED B’s current level of operating cash is high enough to cover debt.

Can SVED B meet its short-term obligations with the cash in hand?

Looking at SVED B’s kr223m in current liabilities, the company has been able to meet these obligations given the level of current assets of kr307m, with a current ratio of 1.37x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Building companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is SVED B’s debt level acceptable?

With total debt exceeding equity, SVED B is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether SVED B is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SVED B's, case, the ratio of 15.51x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SVED B ample headroom to grow its debt facilities.

Next Steps:

Although SVED B’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 SVED B has company-specific issues impacting its capital structure decisions. I suggest you continue to research Svedbergs i Dalstorp to get a more holistic view of the small-cap by looking at: