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Investors are always looking for growth in small-cap stocks like Fagron NV (ENXTBR:FAGR), with a market cap of €911.82M. However, an important fact which most ignore is: how financially healthy is the business? Healthcare companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into FAGR here.
Does FAGR generate enough cash through operations?
Over the past year, FAGR has reduced its debt from €589.52M to €296.97M , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at €60.77M , ready to deploy into the business. Moreover, FAGR has generated cash from operations of €84.25M during the same period of time, resulting in an operating cash to total debt ratio of 28.37%, signalling that FAGR’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FAGR’s case, it is able to generate 0.28x cash from its debt capital.
Does FAGR’s liquid assets cover its short-term commitments?
At the current liabilities level of €108.24M liabilities, the company has been able to meet these obligations given the level of current assets of €166.43M, with a current ratio of 1.54x. For Healthcare companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is FAGR’s debt level acceptable?
Since total debt levels have outpaced equities, FAGR 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. We can test if FAGR’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 FAGR, the ratio of 3.85x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving FAGR ample headroom to grow its debt facilities.
Next Steps:
Although FAGR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around FAGR’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 FAGR has been performing in the past. You should continue to research Fagron to get a more holistic view of the small-cap by looking at: