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While small-cap stocks, such as Ibersol, S.G.P.S., S.A. (ELI:IBS) with its market cap of €261m, 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, as mismanagement of capital can lead to 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. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into IBS here.
IBS’s Debt (And Cash Flows)
Over the past year, IBS has reduced its debt from €157m to €133m – this includes long-term debt. With this debt payback, IBS currently has €46m remaining in cash and short-term investments , ready to be used for running the business. Moreover, IBS has generated €46m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 34%, indicating that IBS’s operating cash is sufficient to cover its debt.
Can IBS meet its short-term obligations with the cash in hand?
With current liabilities at €131m, it seems that the business may not be able to easily meet these obligations given the level of current assets of €85m, with a current ratio of 0.65x. The current ratio is the number you get when you divide current assets by current liabilities.
Is IBS’s debt level acceptable?
With a debt-to-equity ratio of 65%, IBS 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 test if IBS’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 IBS, the ratio of 19.72x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving IBS ample headroom to grow its debt facilities.
Next Steps:
IBS’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure IBS has company-specific issues impacting its capital structure decisions. You should continue to research Ibersol S.G.P.S to get a more holistic view of the stock by looking at: