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Investors are always looking for growth in small-cap stocks like Cegedim SA (EPA:CGM), with a market cap of €426.3m. However, an important fact which most ignore is: how financially healthy is the business? Healthcare Services companies, even ones that are profitable, are more likely to be 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, this commentary is still very high-level, so I recommend you dig deeper yourself into CGM here.
How does CGM’s operating cash flow stack up against its debt?
CGM’s debt level has been constant at around €255.8m over the previous year comprising of short- and long-term debt. At this current level of debt, CGM currently has €18.7m remaining in cash and short-term investments for investing into the business. Additionally, CGM has produced cash from operations of €73.5m during the same period of time, resulting in an operating cash to total debt ratio of 28.7%, indicating that CGM’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 CGM’s case, it is able to generate 0.29x cash from its debt capital.
Can CGM pay its short-term liabilities?
At the current liabilities level of €265.3m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.29x. Usually, for Healthcare Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does CGM face the risk of succumbing to its debt-load?
With total debt exceeding equities, CGM is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 CGM’s case, the ratio of 4.23x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CGM’s high interest coverage is seen as responsible and safe practice.
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CGM’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 CGM’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure CGM has company-specific issues impacting its capital structure decisions. You should continue to research Cegedim to get a more holistic view of the small-cap by looking at: