While small-cap stocks, such as Lucas Bols NV (AMS:BOLS) with its market cap of €191m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into BOLS here.
Does BOLS produce enough cash relative to debt?
BOLS’s debt levels have fallen from €53m to €48m over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, BOLS currently has €12m remaining in cash and short-term investments for investing into the business. Moreover, BOLS has produced cash from operations of €19m in the last twelve months, resulting in an operating cash to total debt ratio of 40%, meaning that BOLS’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BOLS’s case, it is able to generate 0.4x cash from its debt capital.
Can BOLS meet its short-term obligations with the cash in hand?
Looking at BOLS’s most recent €20m liabilities, it seems that the business has been able to meet these commitments with a current assets level of €42m, leading to a 2.13x current account ratio. For Beverage companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is BOLS’s debt level acceptable?
BOLS’s level of debt is appropriate relative to its total equity, at 26%. BOLS is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether BOLS is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BOLS’s, case, the ratio of 7.97x 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.
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BOLS’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, 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 BOLS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Lucas Bols to get a more holistic view of the stock by looking at: