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Bell Food Group AG (VTX:BELL) is a small-cap stock with a market capitalization of CHF1.9b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into BELL here.
Does BELL Produce Much Cash Relative To Its Debt?
Over the past year, BELL has ramped up its debt from CHF723m to CHF904m , which includes long-term debt. With this increase in debt, BELL currently has CHF244m remaining in cash and short-term investments to keep the business going. On top of this, BELL has produced cash from operations of CHF324m during the same period of time, resulting in an operating cash to total debt ratio of 36%, meaning that BELL’s operating cash is sufficient to cover its debt.
Does BELL’s liquid assets cover its short-term commitments?
With current liabilities at CHF417m, the company has been able to meet these commitments with a current assets level of CHF1.1b, leading to a 2.76x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Food 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.
Can BELL service its debt comfortably?
With a debt-to-equity ratio of 70%, BELL can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if BELL’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 BELL, the ratio of 16.17x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although BELL’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how BELL has been performing in the past. I recommend you continue to research Bell Food Group to get a better picture of the small-cap by looking at: