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While small-cap stocks, such as Antares Vision S.p.A. (BIT:AV) with its market cap of €607m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into AV here.
AV’s Debt (And Cash Flows)
AV has built up its total debt levels in the last twelve months, from €7.5m to €34m , which includes long-term debt. With this increase in debt, AV currently has €63m remaining in cash and short-term investments to keep the business going. Additionally, AV has generated €14m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 43%, indicating that AV’s debt is appropriately covered by operating cash.
Does AV’s liquid assets cover its short-term commitments?
At the current liabilities level of €43m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.09x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is AV’s debt level acceptable?
AV is a relatively highly levered company with a debt-to-equity of 47%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AV's case, the ratio of 99.61x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as AV’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although AV’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around AV'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 AV has been performing in the past. You should continue to research Antares Vision to get a better picture of the small-cap by looking at: