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Investors are always looking for growth in small-cap stocks like Finnair Oyj (HEL:FIA1S), with a market cap of €857m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into FIA1S here.
Does FIA1S Produce Much Cash Relative To Its Debt?
FIA1S's debt levels surged from €715m to €1.7b over the last 12 months , which accounts for long term debt. With this increase in debt, FIA1S currently has €1.2b remaining in cash and short-term investments , ready to be used for running the business. Additionally, FIA1S has produced €423m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 24%, signalling that FIA1S’s operating cash is sufficient to cover its debt.
Can FIA1S pay its short-term liabilities?
At the current liabilities level of €1.4b, it seems that the business has been able to meet these obligations given the level of current assets of €1.5b, with a current ratio of 1.03x. The current ratio is calculated by dividing current assets by current liabilities. For Airlines 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.
Does FIA1S face the risk of succumbing to its debt-load?
With debt reaching 68% of equity, FIA1S may be thought of as relatively highly levered. 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 FIA1S 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 FIA1S's, case, the ratio of 3.12x suggests that interest is appropriately 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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FIA1S’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. Since there is also no concerns around FIA1S's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for FIA1S's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Finnair Oyj to get a better picture of the small-cap by looking at: