Can Silver Predator Corp"s (TSXV:SPD) Debt Pose A Serious Problem For The Company?

ver.di Denunzianten und SPD Korruption? (26.3.17, xNeu)

While small-cap stocks, such as Silver Predator Corp (TSXV:SPD) with its market cap of USD $5 Million, are popular for their explosive growth, investors should also pay heed to their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a companys financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone.

When a company is faced with an extreme event undercutting its profits or disrupting its operations temporarily, its the companys ability to meet short-term obligations which allows it to remain in the business. Thus, it becomes utmost important for an investor to test a companys resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. See our latest analysis for SPD

How does Silver Predators operating cash flow stack against its overall debt?

While in short-term operating cash flows can be volatile, on an annual basis, they reflect the true picture of a companys earnings quality and its ability to meet obligations. In the case of Silver Predator, operating cash flow turned out to be -20% of its overall debt over the past twelve months. This indicates that currently Silver Predators expenses exceed revenues. While that can be acceptable for a fast-growing company scaling its business, for a more mature company, these are signs of trouble ahead.

Silver Predator (TSXV:SPD) Historical Debt Mar 28th 17

Can SPD meet its short-term obligations with the cash in hand?

While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, the mismanagement comes into the limelight during tough situations such as economic recession, war, natural disaster, sudden increase in the price of raw materials, and a supply chain risk, which can put a company in a difficult situation. However, banks, creditors, wages, and commitment to suppliers do not go away even during an extreme event. So, a company must maintain enough liquidity to meet its short-term obligations to survive. Silver Predator short term (1 year) commitments are greater than its holdings of cash and other short term assets.

Silver predator (tsxv:spd) net worth mar 28th 17

is silver Predators level of debt at an acceptable level?

While ideally I reckon the debt-to equity ratio of a financially healthy company to be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For Silver Predator, the debt to equity ratio is 219.9% and this indicates that the company is holding a high level of debt / liabilities compared to its net worth, and in the event of financial stress may experience difficulty meeting debt or interest obligations. A more empirical and universal test is to measure the interest payments against earnings of a company. In an ideal situation, earnings should cover interest by at least a 5x multiple; thus, reducing any concerns related to high volatility in net income due to small fluctuations in operating performance. In SPDs case the company is making a loss, therefore interest on debt is not well covered by earnings.

Final words

With a high level of debt on its balance sheet, Silver Predator could still be in a financially strong position if its operating cash flows and earnings stack up. In this case, Silver Predators cash flows and earnings tell a different story. It needs to do a lot of work on its profitability and operational efficiency to be designated as a financially sound company.

Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on Silver Predator to see what are SPDs growth prospects and whether it could be considered an undervalued opportunity.

PS. If you are not interested in Silver Predator anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.

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