While small-cap stocks, such as LUDWIG BECK am Rathauseck – Textilhaus Feldmeier AG (FRA:ECK) with its market cap of €105m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Multiline Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into ECK here.

How much cash does ECK generate through its operations?

ECK’s debt level has been constant at around €43m over the previous year – this includes both the current and long-term debt. At this constant level of debt, ECK currently has €1m remaining in cash and short-term investments for investing into the business. Additionally, ECK has generated cash from operations of €6m over the same time period, resulting in an operating cash to total debt ratio of 15%, indicating that ECK’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ECK’s case, it is able to generate 0.15x cash from its debt capital.

Does ECK’s liquid assets cover its short-term commitments?

With current liabilities at €22m, the company has been able to meet these obligations given the level of current assets of €27m, with a current ratio of 1.2x. Generally, for Multiline Retail companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can ECK service its debt comfortably?

With a debt-to-equity ratio of 58%, ECK can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if ECK’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 ECK, the ratio of 5.78x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

At its current level of cash flow coverage, ECK has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure ECK has company-specific issues impacting its capital structure decisions. I suggest you continue to research LUDWIG BECK am Rathauseck – Textilhaus Feldmeier to get a more holistic view of the stock by looking at: