Yahoo Finance What Investors Should Know About Super Retail Group Limited’s (ASX:SUL) Financial Strength
While small-cap stocks, such as Super Retail Group Limited (ASX:SUL) with its market cap of AU$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SUL here.
How does SUL’s operating cash flow stack up against its debt?
SUL’s debt levels surged from AU$402m to AU$440m over the last 12 months – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$15m , ready to deploy into the business. On top of this, SUL has generated AU$308m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 70%, signalling that SUL’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SUL’s case, it is able to generate 0.7x cash from its debt capital.
Can SUL pay its short-term liabilities?
Looking at SUL’s most recent AU$427m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.38x. For Specialty Retail companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is SUL’s debt level acceptable?
SUL is a relatively highly levered company with a debt-to-equity of 55%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if SUL’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 SUL, the ratio of 10.59x 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:
Although SUL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around SUL’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure SUL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Super Retail Group to get a more holistic view of the small-cap by looking at:
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.
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.
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.
