While small-cap stocks, such as SANOCHEMIA Pharmazeutika AG (ETR:SAC) with its market cap of €22.4m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Pharmaceuticals companies, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SAC here.
Does SAC produce enough cash relative to debt?
SAC’s debt levels have fallen from €25.0m to €17.7m over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at €3.9m , ready to deploy into the business. Moreover, SAC has produced cash from operations of €4.6m in the last twelve months, leading to an operating cash to total debt ratio of 26.2%, indicating that SAC’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SAC’s case, it is able to generate 0.26x cash from its debt capital.
Can SAC pay its short-term liabilities?
With current liabilities at €15.1m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.03x. For Pharmaceuticals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SAC’s debt level acceptable?
With a debt-to-equity ratio of 37.8%, SAC’s debt level may be seen as prudent. This range is considered safe as SAC is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether SAC 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 SAC’s, case, the ratio of 2.83x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SAC’s low interest coverage already puts the company at higher risk of default.
Next Steps:
SAC’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. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for SAC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research SANOCHEMIA Pharmazeutika to get a better picture of the stock by looking at: