Yahoo Finance What does Steamships Trading Company Limited’s (ASX:SST) Balance Sheet Tell Us About Its Future?
Investors are always looking for growth in small-cap stocks like Steamships Trading Company Limited (ASX:SST), with a market cap of AU$604.7m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into SST here.
How much cash does SST generate through its operations?
SST’s debt level has been constant at around K431.7m over the previous year made up of current and long term debt. At this current level of debt, the current cash and short-term investment levels stands at K36.6m , ready to deploy into the business. Additionally, SST has generated cash from operations of K86.1m over the same time period, leading to an operating cash to total debt ratio of 19.9%, indicating that SST’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SST’s case, it is able to generate 0.2x cash from its debt capital.
Does SST’s liquid assets cover its short-term commitments?
At the current liabilities level of K192.5m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of K294.6m, with a current ratio of 1.53x. For Industrials companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does SST face the risk of succumbing to its debt-load?
With debt reaching 49.5% of equity, SST may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if SST’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 SST, the ratio of 3.55x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SST ample headroom to grow its debt facilities.
Next Steps:
SST’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how SST has been performing in the past. You should continue to research Steamships Trading to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SST’s future growth? Take a look at our free research report of analyst consensus for SST’s outlook.
Valuation: What is SST 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 SST 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
