Encavis AG (DB:CAPN) is a small-cap stock with a market capitalization of €870.82M. 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? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into CAPN here.

How does CAPN’s operating cash flow stack up against its debt?

CAPN has built up its total debt levels in the last twelve months, from €920.76M to €1.43B , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at €125.80M , ready to deploy into the business. On top of this, CAPN has produced €95.26M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 6.65%, meaning that CAPN’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CAPN’s case, it is able to generate 0.067x cash from its debt capital.

Can CAPN meet its short-term obligations with the cash in hand?

Looking at CAPN’s most recent €162.02M liabilities, it seems that the business has been able to meet these commitments with a current assets level of €265.56M, leading to a 1.64x current account ratio. For Renewable Energy companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is CAPN’s debt level acceptable?

Since total debt levels have outpaced equities, CAPN is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In CAPN’s case, the ratio of 1.23x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.