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While small-cap stocks, such as FIPP SA. (ENXTPA:FIPP) with its market cap of €30.57M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into FIPP here.

Does FIPP generate enough cash through operations?

FIPP has built up its total debt levels in the last twelve months, from €10.45M to €36.83M – this includes both the current and long-term debt. With this rise in debt, FIPP currently has €20.49M remaining in cash and short-term investments for investing into the business. Additionally, FIPP has produced cash from operations of €20.49M over the same time period, resulting in an operating cash to total debt ratio of 55.65%, signalling that FIPP’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FIPP’s case, it is able to generate 0.56x cash from its debt capital.

Does FIPP’s liquid assets cover its short-term commitments?

At the current liabilities level of €49.67M liabilities, the company has not been able to meet these commitments with a current assets level of €25.12M, leading to a 0.51x current account ratio. which is under the appropriate industry ratio of 3x.

Is FIPP’s debt level acceptable?

With a debt-to-equity ratio of 43.16%, FIPP can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.

Next Steps:

Although FIPP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how FIPP has been performing in the past. I suggest you continue to research FIPP to get a more holistic view of the stock by looking at:

• 1. Valuation: What is FIPP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether FIPP is currently mispriced by the market.

• 2. Historical Performance: What has FIPP’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

• 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.