In This Article:
Investors are always looking for growth in small-cap stocks like SergeFerrari Group SA (ENXTPA:SEFER), with a market cap of €127.25M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into SEFER here.
How does SEFER’s operating cash flow stack up against its debt?
Over the past year, SEFER has reduced its debt from €25.76M to €22.91M , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at €35.81M for investing into the business. Additionally, SEFER has produced €8.14M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 35.54%, meaning that SEFER’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SEFER’s case, it is able to generate 0.36x cash from its debt capital.
Can SEFER meet its short-term obligations with the cash in hand?
Looking at SEFER’s most recent €54.13M liabilities, it appears that the company has been able to meet these commitments with a current assets level of €128.47M, leading to a 2.37x current account ratio. For Chemicals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can SEFER service its debt comfortably?
SEFER’s level of debt is appropriate relative to its total equity, at 24.83%. This range is considered safe as SEFER is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether SEFER 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 SEFER’s, case, the ratio of 15.46x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SEFER’s high interest coverage is seen as responsible and safe practice.
Next Steps:
SEFER’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 will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure SEFER has company-specific issues impacting its capital structure decisions. You should continue to research SergeFerrari Group to get a more holistic view of the stock by looking at: