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While small-cap stocks, such as Summerset Group Holdings Limited (NZSE:SUM) with its market cap of NZ$1.24B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Healthcare companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SUM here.
Does SUM generate enough cash through operations?
Over the past year, SUM has ramped up its debt from NZ$251.33M to NZ$278.87M – this includes both the current and long-term debt. With this rise in debt, SUM’s cash and short-term investments stands at NZ$8.65M , ready to deploy into the business. On top of this, SUM has produced NZ$192.61M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 69.07%, meaning that SUM’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SUM’s case, it is able to generate 0.69x cash from its debt capital.
Can SUM meet its short-term obligations with the cash in hand?
With current liabilities at NZ$93.29M, the company has not been able to meet these commitments with a current assets level of NZ$24.02M, leading to a 0.26x current account ratio. which is under the appropriate industry ratio of 3x.
Does SUM face the risk of succumbing to its debt-load?
SUM is a relatively highly levered company with a debt-to-equity of 51.25%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SUM 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 SUM’s, case, the ratio of 1.49x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
SUM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure SUM has company-specific issues impacting its capital structure decisions. I suggest you continue to research Summerset Group Holdings to get a better picture of the stock by looking at: