Shutterfly Inc (NASDAQ:SFLY): Time For A Financial Health Check
Investors are always looking for growth in small-cap stocks like Shutterfly Inc (NASDAQ:SFLY), with a market cap of $1.75B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Online Retail industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I recommend you dig deeper yourself into SFLY here.
How does SFLY’s operating cash flow stack up against its debt?
Over the past year, SFLY has ramped up its debt from $379.7M to $400.5M , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at $315.6M for investing into the business. Additionally, SFLY has generated cash from operations of $193.4M in the last twelve months, resulting in an operating cash to total debt ratio of 48.30%, signalling that SFLY’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SFLY’s case, it is able to generate 0.48x cash from its debt capital.
Can SFLY meet its short-term obligations with the cash in hand?
At the current liabilities level of $220.6M liabilities, the company has been able to meet these commitments with a current assets level of $432.8M, leading to a 1.96x current account ratio. For Online Retail companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does SFLY face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 90.34%, SFLY can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if SFLY’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SFLY, the ratio of 2.58x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SFLY’s low interest coverage already puts the company at higher risk of default.
Next Steps:
SFLY’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure SFLY has company-specific issues impacting its capital structure decisions. I recommend you continue to research Shutterfly to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for SFLY’s future growth? Take a look at our free research report of analyst consensus for SFLY’s outlook.
2. Valuation: What is SFLY 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 SFLY is currently mispriced by the market.
3. 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 pass 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.
