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oOh!media Limited (ASX:OML) is a small-cap stock with a market capitalization of AU$977m. 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? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into OML here.
Does OML produce enough cash relative to debt?
OML’s debt levels have fallen from AU$145m to AU$135m over the last 12 months – this includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at AU$9.5m for investing into the business. On top of this, OML has generated AU$68m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 51%, indicating that OML’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In OML’s case, it is able to generate 0.51x cash from its debt capital.
Does OML’s liquid assets cover its short-term commitments?
With current liabilities at AU$58m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.75x. Generally, for Media 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 OML service its debt comfortably?
With debt at 39% of equity, OML may be thought of as appropriately levered. OML is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether OML 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 OML’s, case, the ratio of 9.97x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as OML’s high interest coverage is seen as responsible and safe practice.
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OML’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure OML has company-specific issues impacting its capital structure decisions. I suggest you continue to research oOh!media to get a more holistic view of the stock by looking at: