S IMMO AG (WBAG:SPI) is a small-cap stock with a market capitalization of €1.08B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into SPI here.
How does SPI’s operating cash flow stack up against its debt?
SPI’s debt levels have fallen from €1.30B to €1.14B over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at €73.39M for investing into the business. Additionally, SPI has produced cash from operations of €72.67M over the same time period, leading to an operating cash to total debt ratio of 6.35%, signalling that SPI’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SPI’s case, it is able to generate 0.064x cash from its debt capital.
Does SPI’s liquid assets cover its short-term commitments?
At the current liabilities level of €216.25M liabilities, the company has not been able to meet these commitments with a current assets level of €104.68M, leading to a 0.48x current account ratio. which is under the appropriate industry ratio of 3x.
Is SPI’s debt level acceptable?
SPI is a highly-leveraged company with debt exceeding equity by over 100%. 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 SPI’s case, the ratio of 2.48x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
SPI’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure SPI has company-specific issues impacting its capital structure decisions. You should continue to research S IMMO to get a more holistic view of the stock by looking at: