HPI AG (MUN:CEW3) is a small-cap stock with a market capitalization of €1.46M. 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? Companies operating in the Electronic industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CEW3 here.

Does CEW3 generate enough cash through operations?

CEW3 has built up its total debt levels in the last twelve months, from €1.43M to €7.84M , which is made up of current and long term debt. With this increase in debt, CEW3 currently has €3.53M remaining in cash and short-term investments , ready to deploy into the business. On top of this, CEW3 has generated €258.00K in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 3.29%, meaning that CEW3’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In CEW3’s case, it is able to generate 0.033x cash from its debt capital.

Can CEW3 meet its short-term obligations with the cash in hand?

Looking at CEW3’s most recent €21.29M liabilities, the company has been able to meet these commitments with a current assets level of €24.25M, leading to a 1.14x current account ratio. For Electronic companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can CEW3 service its debt comfortably?

Since total debt levels have outpaced equities, CEW3 is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since CEW3 is currently loss-making, there’s a question of sustainability of its current operations. 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:

At its current level of cash flow coverage, CEW3 has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how CEW3 has been performing in the past. You should continue to research HPI to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.