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Investors are always looking for growth in small-cap stocks like Tikkurila Oyj (HEL:TIK1V), with a market cap of €645m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into TIK1V here.
TIK1V’s Debt (And Cash Flows)
TIK1V's debt levels surged from €107m to €121m over the last 12 months , which includes long-term debt. With this increase in debt, TIK1V currently has €35m remaining in cash and short-term investments , ready to be used for running the business. Additionally, TIK1V has generated cash from operations of €48m during the same period of time, leading to an operating cash to total debt ratio of 39%, meaning that TIK1V’s current level of operating cash is high enough to cover debt.
Can TIK1V meet its short-term obligations with the cash in hand?
Looking at TIK1V’s €169m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.3x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is TIK1V’s debt level acceptable?
With debt reaching 81% of equity, TIK1V may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if TIK1V’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 TIK1V, the ratio of 89.1x suggests that interest is comfortably 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.
Next Steps:
TIK1V’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for TIK1V's financial health. Other important fundamentals need to be considered alongside. You should continue to research Tikkurila Oyj to get a better picture of the small-cap by looking at: