You Might Like SG Fleet Group Limited (ASX:SGF) But Do You Like Its Debt?
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Investors are always looking for growth in small-cap stocks like SG Fleet Group Limited (ASX:SGF), with a market cap of AU$812m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into SGF here.
SGF’s Debt (And Cash Flows)
SGF's debt levels have fallen from AU$198m to AU$187m over the last 12 months , which includes long-term debt. With this debt repayment, SGF's cash and short-term investments stands at AU$98m , ready to be used for running the business. Moreover, SGF has produced AU$100m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 54%, indicating that SGF’s operating cash is sufficient to cover its debt.
Can SGF pay its short-term liabilities?
With current liabilities at AU$119m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.63x. The current ratio is calculated by dividing current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is SGF’s debt level acceptable?
With a debt-to-equity ratio of 66%, SGF can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if SGF’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SGF, the ratio of 10.42x 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.
Next Steps:
SGF’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. Since there is also no concerns around SGF's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SGF's financial health. Other important fundamentals need to be considered alongside. You should continue to research SG Fleet Group to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for SGF’s future growth? Take a look at our free research report of analyst consensus for SGF’s outlook.
Valuation: What is SGF worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SGF is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
