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Investors are always looking for growth in small-cap stocks like LPKF Laser & Electronics AG (ETR:LPK), with a market cap of €172m. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into LPK here.
How much cash does LPK generate through its operations?
LPK’s debt levels have fallen from €43m to €22m over the last 12 months , which also accounts for long term debt. With this reduction in debt, LPK currently has €7.6m remaining in cash and short-term investments , ready to deploy into the business. On top of this, LPK has generated €16m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 72%, meaning that LPK’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 LPK’s case, it is able to generate 0.72x cash from its debt capital.
Can LPK pay its short-term liabilities?
With current liabilities at €28m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.1x. Generally, for Electronic companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can LPK service its debt comfortably?
With debt at 30% of equity, LPK may be thought of as appropriately levered. This range is considered safe as LPK is not taking on too much debt obligation, which may be constraining for future growth. We can test if LPK’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LPK, the ratio of 9.84x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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LPK’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how LPK has been performing in the past. I recommend you continue to research LPKF Laser & Electronics to get a better picture of the stock by looking at: