Altia Oyj (HLSE:ALTIA) is a small-cap stock with a market capitalization of €314.06M. 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ALTIA here.
Does ALTIA generate an acceptable amount of cash through operations?
ALTIA’s debt levels surged from €74.60M to €101.50M over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at €52.40M for investing into the business. Moreover, ALTIA has produced €37.60M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 37.04%, meaning that ALTIA’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ALTIA’s case, it is able to generate 0.37x cash from its debt capital.
Does ALTIA’s liquid assets cover its short-term commitments?
With current liabilities at €153.40M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.33x. Usually, for Beverage companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can ALTIA service its debt comfortably?
With a debt-to-equity ratio of 74.20%, ALTIA can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether ALTIA 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 ALTIA’s, case, the ratio of 23.55x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ALTIA ample headroom to grow its debt facilities.