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Lehto Group Oyj (HEL:LEHTO) is a small-cap stock with a market capitalization of €248m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? 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. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into LEHTO here.
Does LEHTO Produce Much Cash Relative To Its Debt?
LEHTO's debt levels surged from €37m to €116m over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at €54m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of LEHTO’s operating efficiency ratios such as ROA here.
Does LEHTO’s liquid assets cover its short-term commitments?
Looking at LEHTO’s €269m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.6x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Construction companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is LEHTO’s debt level acceptable?
With a debt-to-equity ratio of 71%, LEHTO can be considered as an above-average leveraged 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 check to see whether LEHTO 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 LEHTO's, case, the ratio of 62.37x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as LEHTO’s high interest coverage is seen as responsible and safe practice.
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Although LEHTO’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how LEHTO has been performing in the past. I suggest you continue to research Lehto Group Oyj to get a more holistic view of the small-cap by looking at: