Is Shanta Gold Limited's (LON:SHG) Balance Sheet Strong Enough To Weather A Storm?
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Shanta Gold Limited (LON:SHG) is a small-cap stock with a market capitalization of UK£54m. 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? Understanding the company's financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into SHG here.
SHG’s Debt (And Cash Flows)
Over the past year, SHG has reduced its debt from US$60m to US$47m – this includes long-term debt. With this debt payback, SHG currently has US$9.0m remaining in cash and short-term investments , ready to be used for running the business. Additionally, SHG has produced US$31m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 66%, meaning that SHG’s current level of operating cash is high enough to cover debt.
Can SHG pay its short-term liabilities?
At the current liabilities level of US$44m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.38x. The current ratio is the number you get when you divide current assets by current liabilities. For Metals and Mining companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SHG’s debt level acceptable?
With a debt-to-equity ratio of 45%, SHG can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether SHG 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 SHG's, case, the ratio of 3.07x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as SHG’s high interest coverage is seen as responsible and safe practice.
Next Steps:
SHG’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 SHG's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how SHG has been performing in the past. You should continue to research Shanta Gold to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for SHG’s future growth? Take a look at our free research report of analyst consensus for SHG’s outlook.
Valuation: What is SHG 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 SHG 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.
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