Is Lisi S.A.'s (EPA:FII) Balance Sheet A Threat To Its Future?

Simply Wall St

Wed, Jun 12, 2019, 12:20 AM

Investors are always looking for growth in small-cap stocks like Lisi S.A. (EPA:FII), with a market cap of €1.5b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into FII here.

FII’s Debt (And Cash Flows)

Over the past year, FII has maintained its debt levels at around €497m – this includes long-term debt. At this stable level of debt, FII currently has €157m remaining in cash and short-term investments to keep the business going. Moreover, FII has produced €194m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 39%, indicating that FII’s debt is appropriately covered by operating cash.

Can FII meet its short-term obligations with the cash in hand?

With current liabilities at €473m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.68x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Aerospace & Defense companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ENXTPA:FII Historical Debt, June 12th 2019

Can FII service its debt comfortably?

With debt reaching 53% of equity, FII may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In FII's case, the ratio of 51.7x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FII ample headroom to grow its debt facilities.

Next Steps:

Although FII’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 FII has been performing in the past. I suggest you continue to research Lisi to get a better picture of the small-cap by looking at: