Investors are always looking for growth in small-cap stocks like Snaitech Sp.A. (BIT:SNA), with a market cap of €355.62M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into SNA here.

How does SNA’s operating cash flow stack up against its debt?

SNA’s debt level has been constant at around €566.39M over the previous year made up of current and long term debt. At this constant level of debt, SNA currently has €154.56M remaining in cash and short-term investments , ready to deploy into the business. Additionally, SNA has generated €83.95M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 14.82%, signalling that SNA’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SNA’s case, it is able to generate 0.15x cash from its debt capital.

Does SNA’s liquid assets cover its short-term commitments?

Looking at SNA’s most recent €204.34M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.57x. Generally, for Hospitality companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Can SNA service its debt comfortably?

With total debt exceeding equities, SNA is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if SNA’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 SNA, the ratio of 2.02x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

SNA’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure SNA has company-specific issues impacting its capital structure decisions. I suggest you continue to research Snaitech to get a more holistic view of the stock by looking at: