Investors are always looking for growth in small-cap stocks like Chemoservis-Dwory SA. (WSE:CHS), with a market cap of ZŁ25.01M. However, an important fact which most ignore is: how financially healthy is the business? So, 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. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into CHS here.
How does CHS’s operating cash flow stack up against its debt?
Over the past year, CHS has ramped up its debt from ZŁ39.31M to ZŁ48.60M , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at ZŁ8.19M for investing into the business. Additionally, CHS has generated ZŁ124.37K in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 0.26%, signalling that CHS’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CHS’s case, it is able to generate 0.0026x cash from its debt capital.
Can CHS pay its short-term liabilities?
At the current liabilities level of ZŁ82.17M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.52x. Generally, for Commercial Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CHS face the risk of succumbing to its debt-load?
CHS is a relatively highly levered company with a debt-to-equity of 55.28%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if CHS’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 CHS, the ratio of 25.98x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as CHS’s high interest coverage is seen as responsible and safe practice.
Next Steps:
At its current level of cash flow coverage, CHS has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for CHS’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Chemoservis-Dwory to get a more holistic view of the stock by looking at: