Investors are always looking for growth in small-cap stocks like Siburan Resources Limited (ASX:SBU), with a market cap of A$3.49M. However, an important fact which most ignore is: how financially healthy is the business? Given that SBU is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into SBU here.
Does SBU generate an acceptable amount of cash through operations?
Over the past year, SBU has ramped up its debt from A$0.6M to A$0.7M – this includes both the current and long-term debt. With this rise in debt, SBU’s cash and short-term investments stands at A$1.1M for investing into the business. However, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of SBU’s operating efficiency ratios such as ROA here.
Can SBU pay its short-term liabilities?
At the current liabilities level of A$0.7M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of A$1.1M, with a current ratio of 1.52x. Generally, for metals and mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does SBU face the risk of succumbing to its debt-load?
SBU is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since SBU is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? SBU’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that SBU’s financial situation may change. You should always be keeping on top of market expectations for SBU’s future growth on our free analysis platform.