Yahoo Finance What Investors Should Know About Serco Group plc's (LON:SRP) Financial Strength
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While small-cap stocks, such as Serco Group plc (LON:SRP) with its market cap of UK£1.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into SRP here.
Does SRP Produce Much Cash Relative To Its Debt?
SRP has shrunk its total debt levels in the last twelve months, from UK£292m to UK£254m , which also accounts for long term debt. With this reduction in debt, SRP's cash and short-term investments stands at UK£63m to keep the business going. On top of this, SRP has produced UK£2.7m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 1.1%, signalling that SRP’s current level of operating cash is not high enough to cover debt.
Can SRP pay its short-term liabilities?
With current liabilities at UK£675m, it seems that the business may not have an easy time meeting these commitments with a current assets level of UK£644m, leading to a current ratio of 0.95x. The current ratio is the number you get when you divide current assets by current liabilities.
Can SRP service its debt comfortably?
With debt reaching 66% of equity, SRP may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether SRP 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 SRP's, case, the ratio of 8.28x suggests that interest is appropriately 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 SRP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how SRP has been performing in the past. You should continue to research Serco Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SRP’s future growth? Take a look at our free research report of analyst consensus for SRP’s outlook.
Valuation: What is SRP 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 SRP 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 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.
