Sundance Resources Limited (ASX:SDL): Time For A Financial Health Check

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While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. 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. In the case of SDL, operating cash flow turned out to be -0.04x its debt level over the past twelve months. This means what SDL 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 SDL’s operations at this point in time.

Can SDL pay its short-term liabilities?

In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. In times of adverse events, SDL may need to liquidate its short-term assets to pay these immediate obligations. We test for SDL’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that SDL does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.

Is SDL’s level of debt at an acceptable level?

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. SDL’s debt-to-equity ratio exceeds 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate.

Next Steps:

Are you a shareholder? With a high level of debt on its balance sheet, SDL could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for SDL to increase its operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. In the future, SDL’s financial situation may change. I recommend keeping abreast of market expectations for SDL’s future growth on our free analysis platform.