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Clever Global, S.A. (BME:CLE) is a small-cap stock with a market capitalization of €4.7m. 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? Since CLE is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into CLE here.
CLE’s Debt (And Cash Flows)
Over the past year, CLE has ramped up its debt from €5.1m to €6.1m , which accounts for long term debt. With this growth in debt, CLE's cash and short-term investments stands at €2.6m , ready to be used for running the business. Moreover, CLE has produced cash from operations of €1.6m during the same period of time, resulting in an operating cash to total debt ratio of 26%, meaning that CLE’s current level of operating cash is high enough to cover debt.
Can CLE meet its short-term obligations with the cash in hand?
Looking at CLE’s €6.1m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €6.6m, with a current ratio of 1.08x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for IT 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.
Can CLE service its debt comfortably?
Since total debt levels exceed equity, CLE is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since CLE is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although CLE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 CLE's financial health. Other important fundamentals need to be considered alongside. You should continue to research Clever Global to get a more holistic view of the small-cap by looking at: