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While small-cap stocks, such as Matas A/S (CPH:MATAS) with its market cap of ø2.3b, 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. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into MATAS here.
Does MATAS produce enough cash relative to debt?
MATAS’s debt levels have fallen from ø1.7b to ø1.6b over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, MATAS’s cash and short-term investments stands at ø194m for investing into the business. On top of this, MATAS has generated ø412m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 26%, meaning that MATAS’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MATAS’s case, it is able to generate 0.26x cash from its debt capital.
Can MATAS meet its short-term obligations with the cash in hand?
Looking at MATAS’s most recent ø1.2b liabilities, the company may not have an easy time meeting these commitments with a current assets level of ø1.1b, leading to a current ratio of 0.96x.
Is MATAS’s debt level acceptable?
With debt reaching 65% of equity, MATAS may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MATAS 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 MATAS’s, case, the ratio of 20.66x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving MATAS ample headroom to grow its debt facilities.
Next Steps:
Although MATAS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure MATAS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Matas to get a more holistic view of the stock by looking at: