Are Indutrade AB (publ)'s (STO:INDT) Interest Costs Too High?

Simply Wall St

Sat, Jun 1, 2019, 1:35 AM

Indutrade AB (publ) (STO:INDT) is a small-cap stock with a market capitalization of kr33b. 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into INDT here.

Does INDT Produce Much Cash Relative To Its Debt?

Over the past year, INDT has ramped up its debt from kr4.6b to kr5.3b , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at kr465m , ready to be used for running the business. Additionally, INDT has generated cash from operations of kr1.5b over the same time period, resulting in an operating cash to total debt ratio of 29%, signalling that INDT’s current level of operating cash is high enough to cover debt.

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

Looking at INDT’s kr4.9b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.47x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Trade Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is INDT’s debt level acceptable?

With a debt-to-equity ratio of 79%, INDT can be considered as an above-average leveraged company. 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 INDT 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 INDT's, case, the ratio of 27.63x 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.