Steilmann SE (DB:STE) is a small-cap stock with a market capitalization of €673.50K. 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? Companies operating in the Specialty Retail industry facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into STE here.
How does STE’s operating cash flow stack up against its debt?
Over the past year, STE has ramped up its debt from €111.81M to €189.61M – this includes both the current and long-term debt. With this rise in debt, STE currently has €98.61M remaining in cash and short-term investments , ready to deploy into the business. On top of this, STE has generated cash from operations of €40.33M over the same time period, leading to an operating cash to total debt ratio of 21.27%, signalling that STE’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In STE’s case, it is able to generate 0.21x cash from its debt capital.
Can STE pay its short-term liabilities?
At the current liabilities level of €302.71M liabilities, the company has been able to meet these obligations given the level of current assets of €381.32M, with a current ratio of 1.26x. Generally, for Specialty Retail companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can STE service its debt comfortably?
With debt reaching 92.80% of equity, STE may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since STE is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
STE’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. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure STE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Steilmann to get a better picture of the stock by looking at: