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Safilo Group SpA (BIT:SFL) is a small-cap stock with a market capitalization of €175.4m. 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 SFL is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into SFL here.
Does SFL produce enough cash relative to debt?
SFL has built up its total debt levels in the last twelve months, from €190.9m to €284.1m – this includes both the current and long-term debt. With this increase in debt, SFL’s cash and short-term investments stands at €112.9m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of SFL’s operating efficiency ratios such as ROA here.
Does SFL’s liquid assets cover its short-term commitments?
Looking at SFL’s most recent €595.9m 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 1.07x. Generally, for Luxury companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SFL’s debt level acceptable?
SFL is a relatively highly levered company with a debt-to-equity of 53.6%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since SFL is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
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At its current level of cash flow coverage, SFL has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for SFL’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Safilo Group to get a better picture of the stock by looking at: