FACC AG (WBAG:FACC) is a small-cap stock with a market capitalization of €931.83M. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about 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. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into FACC here.
Does FACC generate enough cash through operations?
FACC has built up its total debt levels in the last twelve months, from €233.19M to €245.29M , which comprises of short- and long-term debt. With this increase in debt, FACC currently has €48.28M remaining in cash and short-term investments for investing into the business. On top of this, FACC has produced €20.03M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 8.17%, meaning that FACC’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FACC’s case, it is able to generate 0.082x cash from its debt capital.
Can FACC meet its short-term obligations with the cash in hand?
With current liabilities at €177.07M, it appears that the company has been able to meet these commitments with a current assets level of €327.90M, leading to a 1.85x current account ratio. For Aerospace & Defense companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can FACC service its debt comfortably?
FACC is a relatively highly levered company with a debt-to-equity of 75.68%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if FACC’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 FACC, the ratio of 16.4x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FACC ample headroom to grow its debt facilities.