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Investors are always looking for growth in small-cap stocks like elumeo SE (FRA:ELB), with a market cap of €11m. However, an important fact which most ignore is: how financially healthy is the business? Since ELB is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ELB here.
Does ELB produce enough cash relative to debt?
ELB’s debt levels have fallen from €14m to €13m over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, ELB currently has €991k remaining in cash and short-term investments for investing into the business. On top of this, ELB has generated cash from operations of €731k in the last twelve months, leading to an operating cash to total debt ratio of 5.5%, indicating that ELB’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In ELB’s case, it is able to generate 0.055x cash from its debt capital.
Does ELB’s liquid assets cover its short-term commitments?
Looking at ELB’s most recent €20m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €40m, with a current ratio of 1.94x. For Luxury companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can ELB service its debt comfortably?
With a debt-to-equity ratio of 46%, ELB 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. But since ELB is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
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ELB’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how ELB has been performing in the past. You should continue to research elumeo to get a more holistic view of the stock by looking at: