Yahoo Finance Is The SimplyBiz Group plc’s (LON:SBIZ) Balance Sheet A Threat To Its Future?
The SimplyBiz Group plc (LON:SBIZ) is a small-cap stock with a market capitalization of UK£153.2m. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about 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 SBIZ here.
How much cash does SBIZ generate through its operations?
SBIZ’s debt levels have fallen from UK£33.4m to UK£10.0m over the last 12 months , which is made up of current and long term debt. With this debt payback, SBIZ currently has UK£10.7m remaining in cash and short-term investments , ready to deploy into the business. Moreover, SBIZ has generated UK£5.2m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 52.3%, indicating that SBIZ’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SBIZ’s case, it is able to generate 0.52x cash from its debt capital.
Does SBIZ’s liquid assets cover its short-term commitments?
Looking at SBIZ’s most recent UK£19.6m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.04x. Generally, for Professional Services companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does SBIZ face the risk of succumbing to its debt-load?
With debt reaching 44.3% of equity, SBIZ 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. 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 after interest and tax at least three times its net interest payments is considered financially sound. In SBIZ’s case, the ratio of 3.43x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SBIZ ample headroom to grow its debt facilities.
Next Steps:
Although SBIZ’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. 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 SBIZ has been performing in the past. You should continue to research SimplyBiz Group to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for SBIZ’s future growth? Take a look at our free research report of analyst consensus for SBIZ’s outlook.
Valuation: What is SBIZ 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 SBIZ 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.
