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Investors are always looking for growth in small-cap stocks like Plan Optik AG (FRA:P4O), with a market cap of €7m. However, an important fact which most ignore is: how financially healthy is the business? Semiconductor companies, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into P4O here.
How does P4O’s operating cash flow stack up against its debt?
P4O has shrunken its total debt levels in the last twelve months, from €1m to €1m , which comprises of short- and long-term debt. With this reduction in debt, P4O currently has €2m remaining in cash and short-term investments for investing into the business. Moreover, P4O has generated €908k in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 67%, meaning that P4O’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In P4O’s case, it is able to generate 0.67x cash from its debt capital.
Can P4O meet its short-term obligations with the cash in hand?
At the current liabilities level of €1m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of €5m, with a current ratio of 5.07x. Having said that, anything above 3x may be considered excessive by some investors. They might argue P4O is leaving too much capital in low-earning investments.
Is P4O’s debt level acceptable?
With a debt-to-equity ratio of 19%, P4O’s debt level may be seen as prudent. P4O is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if P4O’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 P4O, the ratio of 9.75x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving P4O ample headroom to grow its debt facilities.
Next Steps:
P4O has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure P4O has company-specific issues impacting its capital structure decisions. You should continue to research Plan Optik to get a better picture of the stock by looking at: