Investors are always looking for growth in small-cap stocks like Komputronik SA. (WSE:KOM), with a market cap of ZŁ53.87M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into KOM here.
Does KOM generate an acceptable amount of cash through operations?
KOM has built up its total debt levels in the last twelve months, from ZŁ92.40M to ZŁ109.62M – this includes both the current and long-term debt. With this growth in debt, KOM’s cash and short-term investments stands at ZŁ22.28M , ready to deploy into the business. Moreover, KOM has generated cash from operations of ZŁ34.53M over the same time period, resulting in an operating cash to total debt ratio of 31.50%, signalling that KOM’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 KOM’s case, it is able to generate 0.31x cash from its debt capital.
Does KOM’s liquid assets cover its short-term commitments?
With current liabilities at ZŁ357.66M, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.19x. For Specialty Retail companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does KOM face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 44.93%, KOM can be considered as an above-average leveraged 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 KOM’s case, the ratio of 6.61x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.