In This Article:
While small-cap stocks, such as GROUPE SFPI SA (EPA:SFPI) with its market cap of €243m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Electronic industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into SFPI here.
Does SFPI produce enough cash relative to debt?
SFPI’s debt levels surged from €43m to €92m over the last 12 months – this includes both the current and long-term debt. With this rise in debt, SFPI currently has €133m remaining in cash and short-term investments for investing into the business. Moreover, SFPI has produced cash from operations of €39m during the same period of time, resulting in an operating cash to total debt ratio of 42%, indicating that SFPI’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SFPI’s case, it is able to generate 0.42x cash from its debt capital.
Does SFPI’s liquid assets cover its short-term commitments?
Looking at SFPI’s most recent €187m liabilities, it seems that the business has been able to meet these commitments with a current assets level of €384m, leading to a 2.06x current account ratio. For Electronic companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is SFPI’s debt level acceptable?
SFPI is a relatively highly levered company with a debt-to-equity of 42%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if SFPI’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 SFPI, the ratio of 450x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SFPI’s high interest coverage is seen as responsible and safe practice.
Next Steps:
SFPI’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 SFPI’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research GROUPE SFPI to get a better picture of the small-cap by looking at: