Investors are always looking for growth in small-cap stocks like Komax Holding AG (VTX:KOMN), with a market cap of CHF1.0b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into KOMN here.
Does KOMN produce enough cash relative to debt?
KOMN’s debt levels surged from CHF60m to CHF89m 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 CHF61m , ready to deploy into the business. On top of this, KOMN has generated cash from operations of CHF28m during the same period of time, leading to an operating cash to total debt ratio of 32%, meaning that KOMN’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KOMN’s case, it is able to generate 0.32x cash from its debt capital.
Can KOMN meet its short-term obligations with the cash in hand?
With current liabilities at CHF79m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.84x. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Does KOMN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 34%, KOMN’s debt level may be seen as prudent. This range is considered safe as KOMN is not taking on too much debt obligation, which may be constraining for future growth. We can test if KOMN’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 KOMN, the ratio of 31.64x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving KOMN ample headroom to grow its debt facilities.
Next Steps:
KOMN’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how KOMN has been performing in the past. You should continue to research Komax Holding to get a more holistic view of the stock by looking at: