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Investors are always looking for growth in small-cap stocks like Alfen NV. (ENXTAM:ALFEN), with a market cap of €200.00M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into ALFEN here.
Does ALFEN generate an acceptable amount of cash through operations?
ALFEN’s debt levels surged from €2.08M to €3.09M over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, ALFEN’s cash and short-term investments stands at €0 , ready to deploy into the business. Moreover, ALFEN has generated €1.30M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 42.15%, meaning that ALFEN’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ALFEN’s case, it is able to generate 0.42x cash from its debt capital.
Can ALFEN pay its short-term liabilities?
At the current liabilities level of €20.34M liabilities, it seems that the business has been able to meet these commitments with a current assets level of €21.03M, leading to a 1.03x current account ratio. Generally, for Electrical companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ALFEN service its debt comfortably?
With debt reaching 45.46% of equity, ALFEN may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether ALFEN 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 ALFEN’s, case, the ratio of 18.88x 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.
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ALFEN’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 ALFEN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Alfen to get a better picture of the small-cap by looking at: