Southern Cross Media Group Limited (ASX:SXL) is a small-cap stock with a market capitalization of AU$965m. 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? Since SXL is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. 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 SXL here.
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Does SXL Produce Much Cash Relative To Its Debt?
SXL has sustained its debt level by about AU$346m over the last 12 months including long-term debt. At this constant level of debt, SXL's cash and short-term investments stands at AU$50m to keep the business going. Additionally, SXL has produced cash from operations of AU$123m over the same time period, resulting in an operating cash to total debt ratio of 36%, indicating that SXL’s debt is appropriately covered by operating cash.
Can SXL meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$85m, it seems that the business has been able to meet these obligations given the level of current assets of AU$174m, with a current ratio of 2.04x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Media companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SXL service its debt comfortably?
With a debt-to-equity ratio of 79%, SXL 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. However, since SXL is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
SXL’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 SXL'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 SXL has been performing in the past. I recommend you continue to research Southern Cross Media Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SXL’s future growth? Take a look at our free research report of analyst consensus for SXL’s outlook.
- Valuation: What is SXL 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 SXL 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.