Space Hellas SA. (ATSE:SPACE) is a small-cap stock with a market capitalization of €34.87M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? IT companies, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into SPACE here.
Does SPACE generate an acceptable amount of cash through operations?
SPACE has built up its total debt levels in the last twelve months, from €15.97M to €17.77M , which comprises of short- and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at €7.71M , ready to deploy into the business. Moreover, SPACE has generated €1.25M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 7.04%, indicating that SPACE’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SPACE’s case, it is able to generate 0.07x cash from its debt capital.
Can SPACE pay its short-term liabilities?
Looking at SPACE’s most recent €25.36M liabilities, the company has been able to meet these obligations given the level of current assets of €30.39M, with a current ratio of 1.2x. Generally, for IT companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can SPACE service its debt comfortably?
Since total debt levels have outpaced equities, SPACE is a highly leveraged 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 SPACE’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 SPACE, the ratio of 1.68x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.