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Investors are always looking for growth in small-cap stocks like SITI - B&T Group S.p.A. (BIT:SITI), with a market cap of €52m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into SITI here.
SITI’s Debt (And Cash Flows)
SITI's debt levels have fallen from €55m to €51m over the last 12 months , which includes long-term debt. With this debt repayment, SITI currently has €6.0m remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of SITI’s operating efficiency ratios such as ROA here.
Can SITI meet its short-term obligations with the cash in hand?
Looking at SITI’s €117m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of €195m, with a current ratio of 1.66x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SITI service its debt comfortably?
With debt reaching 58% of equity, SITI may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SITI's case, the ratio of 5.18x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SITI ample headroom to grow its debt facilities.
Next Steps:
SITI’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around SITI's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how SITI has been performing in the past. You should continue to research SITI - B&T Group to get a more holistic view of the small-cap by looking at: