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Conduril – Engenharia SA (ELI:CDU) is a small-cap stock with a market capitalization of €72m. 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? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into CDU here.
How much cash does CDU generate through its operations?
CDU’s debt levels have fallen from €131m to €117m over the last 12 months – this includes long-term debt. With this reduction in debt, CDU currently has €94m remaining in cash and short-term investments , ready to deploy into the business. On top of this, CDU has generated cash from operations of €23m in the last twelve months, resulting in an operating cash to total debt ratio of 20%, signalling that CDU’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CDU’s case, it is able to generate 0.2x cash from its debt capital.
Can CDU meet its short-term obligations with the cash in hand?
With current liabilities at €147m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.83x. Usually, for Construction 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.
Is CDU’s debt level acceptable?
With debt reaching 54% of equity, CDU may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In CDU’s case, the ratio of 5.89x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CDU’s high interest coverage is seen as responsible and safe practice.
Next Steps:
CDU’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. Since there is also no concerns around CDU’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for CDU’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Conduril – Engenharia to get a better picture of the small-cap by looking at: