While small-cap stocks, such as CENTROTEC Sustainable AG (ETR:CEV) with its market cap of €213m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into CEV here.
How much cash does CEV generate through its operations?
CEV’s debt levels surged from €97m to €191m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, CEV currently has €158m remaining in cash and short-term investments , ready to deploy into the business. Additionally, CEV has produced cash from operations of €32m over the same time period, leading to an operating cash to total debt ratio of 17%, signalling that CEV’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CEV’s case, it is able to generate 0.17x cash from its debt capital.
Can CEV meet its short-term obligations with the cash in hand?
At the current liabilities level of €135m liabilities, it seems that the business has been able to meet these commitments with a current assets level of €333m, leading to a 2.46x current account ratio. Usually, for Building companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can CEV service its debt comfortably?
With a debt-to-equity ratio of 84%, CEV can be considered as an above-average leveraged company. 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 CEV’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 CEV, the ratio of 8.99x suggests that interest is appropriately 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:
At its current level of cash flow coverage, CEV has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure CEV has company-specific issues impacting its capital structure decisions. You should continue to research CENTROTEC Sustainable to get a more holistic view of the stock by looking at: