Investors are always looking for growth in small-cap stocks like Cellnovo Limited (ENXTPA:CLNV), with a market cap of €51.21M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Medical Equipment industry, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into CLNV here.
How does CLNV’s operating cash flow stack up against its debt?
CLNV’s debt levels have fallen from €2.78M to €1.66M over the last 12 months – this includes both the current and long-term debt. With this debt payback, CLNV currently has €10.93M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of CLNV’s operating efficiency ratios such as ROA here.
Can CLNV meet its short-term obligations with the cash in hand?
Looking at CLNV’s most recent €4.38M liabilities, the company has been able to meet these commitments with a current assets level of €15.28M, leading to a 3.49x current account ratio. Though, anything about 3x may be excessive, since CLNV may be leaving too much capital in low-earning investments.
Does CLNV face the risk of succumbing to its debt-load?
CLNV is a relatively highly levered company with a debt-to-equity of 42.05%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since CLNV is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
CLNV’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how CLNV has been performing in the past. You should continue to research Cellnovo to get a better picture of the stock by looking at: