Are Super Retail Group Limited's (ASX:SUL) Interest Costs Too High?

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While small-cap stocks, such as Super Retail Group Limited (ASX:SUL) with its market cap of AU$1.9b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to 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. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into SUL here.

Does SUL Produce Much Cash Relative To Its Debt?

SUL has built up its total debt levels in the last twelve months, from AU$230m to AU$357m , which accounts for long term debt. With this rise in debt, SUL currently has AU$63m remaining in cash and short-term investments , ready to be used for running the business. Moreover, SUL has generated AU$250m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 70%, meaning that SUL’s debt is appropriately covered by operating cash.

Can SUL pay its short-term liabilities?

Looking at SUL’s AU$656m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$730m, with a current ratio of 1.11x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Specialty Retail companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

ASX:SUL Historical Debt, July 16th 2019
ASX:SUL Historical Debt, July 16th 2019

Can SUL service its debt comfortably?

With a debt-to-equity ratio of 45%, SUL 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SUL's case, the ratio of 9.4x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as SUL’s high interest coverage is seen as responsible and safe practice.

Next Steps:

SUL’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how SUL has been performing in the past. You should continue to research Super Retail Group to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SUL’s future growth? Take a look at our free research report of analyst consensus for SUL’s outlook.

  2. Valuation: What is SUL 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 SUL is currently mispriced by the market.

  3. 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.