While small-cap stocks, such as Implenia AG (VTX:IMPN) with its market cap of CHF986m, 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into IMPN here.
Does IMPN produce enough cash relative to debt?
Over the past year, IMPN has ramped up its debt from CHF483m to CHF508m – this includes both the current and long-term debt. With this increase in debt, IMPN’s cash and short-term investments stands at CHF821m for investing into the business. Moreover, IMPN has generated cash from operations of CHF118m in the last twelve months, resulting in an operating cash to total debt ratio of 23%, indicating that IMPN’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In IMPN’s case, it is able to generate 0.23x cash from its debt capital.
Does IMPN’s liquid assets cover its short-term commitments?
With current liabilities at CHF1.6b, the company has been able to meet these commitments with a current assets level of CHF2.2b, leading to a 1.33x current account ratio. For Construction companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can IMPN service its debt comfortably?
With a debt-to-equity ratio of 84%, IMPN 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. 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 IMPN’s case, the ratio of 11.98x 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:
At its current level of cash flow coverage, IMPN has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for IMPN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Implenia to get a better picture of the stock by looking at: