What You Must Know About Story-I Limited’s (ASX:SRY) Financial Strength

Andrew Carroll

Mon, Feb 4, 2019, 5:58 PM

Story-I Limited (ASX:SRY) is a small-cap stock with a market capitalization of AU$7.7m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into SRY here.

Does SRY produce enough cash relative to debt?

Over the past year, SRY has reduced its debt from AU$2.2m to AU$1.7m . With this debt payback, SRY’s cash and short-term investments stands at AU$1.9m for investing into the business. On top of this, SRY has produced AU$2.1m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 123%, indicating that SRY’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SRY’s case, it is able to generate 1.23x cash from its debt capital.

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

With current liabilities at AU$9.0m, the company has been able to meet these obligations given the level of current assets of AU$21m, with a current ratio of 2.35x. Usually, for Specialty Retail 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.

Does SRY face the risk of succumbing to its debt-load?

With debt at 12% of equity, SRY may be thought of as appropriately levered. This range is considered safe as SRY is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether SRY 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 SRY’s, case, the ratio of 8.18x 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.