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Geratherm Medical AG (ETR:GME) is a small-cap stock with a market capitalization of €49m. 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? Medical Equipment companies, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into GME here.
How much cash does GME generate through its operations?
GME has built up its total debt levels in the last twelve months, from €2.0m to €2.8m – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at €9.9m , ready to deploy into the business. Additionally, GME has generated €4.0m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 143%, indicating that GME’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GME’s case, it is able to generate 1.43x cash from its debt capital.
Can GME pay its short-term liabilities?
At the current liabilities level of €4.4m, it appears that the company has been able to meet these obligations given the level of current assets of €21m, with a current ratio of 4.68x. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can GME service its debt comfortably?
GME’s level of debt is appropriate relative to its total equity, at 14%. GME is not taking on too much debt commitment, which may be constraining for future growth. We can test if GME’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 GME, the ratio of 7.07x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as GME’s high interest coverage is seen as responsible and safe practice.
Next Steps:
GME has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how GME has been performing in the past. I recommend you continue to research Geratherm Medical to get a better picture of the stock by looking at: