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While small-cap stocks, such as Constructions Industrielles de la Méditerranée (EPA:COM) with its market cap of €214m, 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. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into COM here.
COM’s Debt (And Cash Flows)
COM's debt levels surged from €54m to €77m over the last 12 months – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €86m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of COM’s operating efficiency ratios such as ROA here.
Can COM pay its short-term liabilities?
Looking at COM’s €370m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of €446m, leading to a 1.21x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Commercial Services companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does COM face the risk of succumbing to its debt-load?
With debt reaching 40% of equity, COM may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.
Next Steps:
Although COM’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 COM's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how COM has been performing in the past. I suggest you continue to research Constructions Industrielles de la Méditerranée to get a more holistic view of the small-cap by looking at: