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Investors are always looking for growth in small-cap stocks like Fiera Milano SpA (BIT:FM), with a market cap of €169.64M. 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into FM here.
How does FM’s operating cash flow stack up against its debt?
FM’s debt levels have fallen from €63.06M to €21.53M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, FM currently has €17.92M remaining in cash and short-term investments , ready to deploy into the business. Moreover, FM has produced €36.78M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 170.84%, signalling that FM’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FM’s case, it is able to generate 1.71x cash from its debt capital.
Can FM pay its short-term liabilities?
At the current liabilities level of €142.01M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.5x, which is below the prudent industry ratio of 3x.
Can FM service its debt comfortably?
With debt at 34.15% of equity, FM may be thought of as appropriately levered. FM is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if FM’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 FM, the ratio of 7.35x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as FM’s high interest coverage is seen as responsible and safe practice.
Next Steps:
FM’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure FM has company-specific issues impacting its capital structure decisions. I recommend you continue to research Fiera Milano to get a more holistic view of the stock by looking at: