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While small-cap stocks, such as Keskisuomalainen Oyj (HLSE:KSLAV) with its market cap of €132.94M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes 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. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into KSLAV here.
How does KSLAV’s operating cash flow stack up against its debt?
Over the past year, KSLAV has reduced its debt from €67.58M to €61.78M – this includes both the current and long-term debt. With this debt repayment, KSLAV’s cash and short-term investments stands at €23.17M , ready to deploy into the business. On top of this, KSLAV has generated €18.58M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 30.08%, indicating that KSLAV’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 KSLAV’s case, it is able to generate 0.3x cash from its debt capital.
Can KSLAV meet its short-term obligations with the cash in hand?
At the current liabilities level of €39.56M liabilities, it seems that the business has been able to meet these commitments with a current assets level of €40.03M, leading to a 1.01x current account ratio. For Media companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is KSLAV’s debt level acceptable?
With debt reaching 74.82% of equity, KSLAV 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 test if KSLAV’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For KSLAV, the ratio of 22.94x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving KSLAV ample headroom to grow its debt facilities.
Next Steps:
KSLAV’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 KSLAV’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for KSLAV’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Keskisuomalainen Oyj to get a better picture of the small-cap by looking at: