Segue Resources Limited (ASX:SEG): Time For A Financial Health Check

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Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, SEG’s operating cash flow was -8.27x its current debt. This means what SEG can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at SEG’s operations at this point in time.

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

In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. As cash flow from operation is hindered by adverse events, SEG may need to liquidate its short-term assets to meet these upcoming payments. We test for SEG’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that SEG does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

Can SEG service its debt comfortably?

While ideally the debt-to equity ratio of a financially healthy company should 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 SEG, the debt-to-equity ratio is 1.33%, which indicates that the company faces low risk associated with debt. 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 at least three times its interest payments is considered financially sound. SEG’s profits amply covers interest at 101.06 times, which is seen as relatively safe. Lenders may be less hesitant to lend out more funding as SEG’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Are you a shareholder? SEG’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. I suggest researching market expectations for SEG’s future growth on our free analysis platform.