While small-cap stocks, such as Société Financière des Caoutchoucs Société Anonyme (BDL:SOFIN) with its market cap of €387.33M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into SOFIN here.
How does SOFIN’s operating cash flow stack up against its debt?
SOFIN has built up its total debt levels in the last twelve months, from €176.63M to €251.76M , which is made up of current and long term debt. With this increase in debt, SOFIN currently has €137.94M remaining in cash and short-term investments , ready to deploy into the business. On top of this, SOFIN has produced €98.61M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 39.17%, signalling that SOFIN’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SOFIN’s case, it is able to generate 0.39x cash from its debt capital.
Can SOFIN meet its short-term obligations with the cash in hand?
At the current liabilities level of €229.90M liabilities, it seems that the business has been able to meet these commitments with a current assets level of €277.25M, leading to a 1.21x current account ratio. Usually, for Food 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 SOFIN service its debt comfortably?
SOFIN’s level of debt is appropriate relative to its total equity, at 34.55%. SOFIN is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether SOFIN 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 SOFIN’s, case, the ratio of 16.65x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SOFIN ample headroom to grow its debt facilities.