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Investors are always looking for growth in small-cap stocks like Scandinavian Tobacco Group A/S (CPSE:STG), with a market cap of Ø10.74B. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about 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, this commentary is still very high-level, so I recommend you dig deeper yourself into STG here.
How does STG’s operating cash flow stack up against its debt?
Over the past year, STG has maintained its debt levels at around Ø2.61B – this includes both the current and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at Ø605.20M for investing into the business. Moreover, STG has produced cash from operations of Ø1.05B over the same time period, resulting in an operating cash to total debt ratio of 40.23%, indicating that STG’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In STG’s case, it is able to generate 0.4x cash from its debt capital.
Can STG pay its short-term liabilities?
Looking at STG’s most recent Ø1.07B liabilities, it appears that the company has been able to meet these obligations given the level of current assets of Ø3.98B, with a current ratio of 3.72x. Though, anything about 3x may be excessive, since STG may be leaving too much capital in low-earning investments.
Can STG service its debt comfortably?
With a debt-to-equity ratio of 30.85%, STG’s debt level may be seen as prudent. STG is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether STG 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 STG’s, case, the ratio of 14.9x suggests that interest is comfortably 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.
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STG’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. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for STG’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Scandinavian Tobacco Group to get a better picture of the stock by looking at: