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While small-cap stocks, such as Keyrus S.A. (EPA:KEY) with its market cap of €72m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into KEY here.
KEY’s Debt (And Cash Flows)
KEY has built up its total debt levels in the last twelve months, from €184k to €67m , which accounts for long term debt. With this increase in debt, KEY's cash and short-term investments stands at €27m to keep the business going. Though, KEY is only producing €61k in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of under 1x, signalling that its operating cash is less than its debt.
Can KEY meet its short-term obligations with the cash in hand?
With current liabilities at €142m, it seems that the business has been able to meet these commitments with a current assets level of €145m, leading to a 1.02x current account ratio. 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 as there's enough of a cash buffer without holding too much capital in low return investments.
Can KEY service its debt comfortably?
With total debt exceeding equity, KEY is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if KEY’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 KEY, the ratio of 10.63x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as KEY’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although KEY’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. Since there is also no concerns around KEY's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure KEY has company-specific issues impacting its capital structure decisions. I suggest you continue to research Keyrus to get a better picture of the small-cap by looking at: