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Autoneum Holding AG (VTX:AUTN) is a small-cap stock with a market capitalization of CHF754m. 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? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into AUTN here.
How much cash does AUTN generate through its operations?
AUTN’s debt levels surged from CHF252m to CHF334m over the last 12 months , which includes long-term debt. With this growth in debt, AUTN currently has CHF75m remaining in cash and short-term investments for investing into the business. Moreover, AUTN has generated cash from operations of CHF146m in the last twelve months, leading to an operating cash to total debt ratio of 44%, meaning that AUTN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AUTN’s case, it is able to generate 0.44x cash from its debt capital.
Can AUTN meet its short-term obligations with the cash in hand?
With current liabilities at CHF553m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.33x. Generally, for Auto Components companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is AUTN’s debt level acceptable?
With debt reaching 50% of equity, AUTN 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 AUTN 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 AUTN’s, case, the ratio of 17.16x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving AUTN ample headroom to grow its debt facilities.