While small-cap stocks, such as Swallowfield plc (LON:SWL) with its market cap of UK£39m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into SWL here.
How much cash does SWL generate through its operations?
SWL has built up its total debt levels in the last twelve months, from UK£7.7m to UK£13m , which accounts for long term debt. With this increase in debt, SWL’s cash and short-term investments stands at UK£934k , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of SWL’s operating efficiency ratios such as ROA here.
Does SWL’s liquid assets cover its short-term commitments?
With current liabilities at UK£25m, it appears that the company has been able to meet these obligations given the level of current assets of UK£34m, with a current ratio of 1.35x. Generally, for Personal Products companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can SWL service its debt comfortably?
With debt reaching 47% of equity, SWL may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 SWL’s case, the ratio of 230x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SWL ample headroom to grow its debt facilities.
SWL’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 SWL’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 SWL has been performing in the past. You should continue to research Swallowfield to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SWL’s future growth? Take a look at our free research report of analyst consensus for SWL’s outlook.
- Valuation: What is SWL 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 SWL 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 firstname.lastname@example.org.