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While small-cap stocks, such as Kamux Oyj (HEL:KAMUX) with its market cap of €260m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into KAMUX here.
Does KAMUX produce enough cash relative to debt?
KAMUX has shrunken its total debt levels in the last twelve months, from €27m to €24m , which also accounts for long term debt. With this debt payback, KAMUX’s cash and short-term investments stands at €14m for investing into the business. Additionally, KAMUX has generated cash from operations of €7.1m in the last twelve months, leading to an operating cash to total debt ratio of 30%, meaning that KAMUX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KAMUX’s case, it is able to generate 0.3x cash from its debt capital.
Can KAMUX pay its short-term liabilities?
With current liabilities at €25m, it appears that the company has been able to meet these commitments with a current assets level of €89m, leading to a 3.53x current account ratio. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can KAMUX service its debt comfortably?
With debt reaching 40% of equity, KAMUX 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. We can check to see whether KAMUX 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 KAMUX’s, case, the ratio of 16.27x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving KAMUX ample headroom to grow its debt facilities.
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KAMUX’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 KAMUX’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for KAMUX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Kamux Oyj to get a better picture of the small-cap by looking at: