Is Floridienne S.A.'s (EBR:FLOB) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

Sun, Jun 9, 2019, 2:32 AM

Investors are always looking for growth in small-cap stocks like Floridienne S.A. (EBR:FLOB), with a market cap of €189m. 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. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into FLOB here.

FLOB’s Debt (And Cash Flows)

FLOB has sustained its debt level by about €112m over the last 12 months including long-term debt. At this constant level of debt, FLOB's cash and short-term investments stands at €30m , ready to be used for running the business. Additionally, FLOB has generated cash from operations of €14m over the same time period, resulting in an operating cash to total debt ratio of 13%, signalling that FLOB’s current level of operating cash is not high enough to cover debt.

Can FLOB meet its short-term obligations with the cash in hand?

Looking at FLOB’s €102m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of €176m, leading to a 1.73x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Food companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

ENXTBR:FLOB Historical Debt, June 9th 2019

Is FLOB’s debt level acceptable?

With debt reaching 84% of equity, FLOB 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 check to see whether FLOB is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In FLOB's, case, the ratio of 3.85x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as FLOB’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although FLOB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around FLOB's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how FLOB has been performing in the past. You should continue to research Floridienne to get a better picture of the small-cap by looking at: