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Investors are always looking for growth in small-cap stocks like STS Group AG (ETR:SF3), with a market cap of €89m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into SF3 here.
How does SF3’s operating cash flow stack up against its debt?
SF3’s debt levels have fallen from €18m to €14m over the last 12 months – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at €32m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of SF3’s operating efficiency ratios such as ROA here.
Can SF3 meet its short-term obligations with the cash in hand?
Looking at SF3’s €173m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of €184m, leading to a 1.07x current account ratio. Usually, for Machinery companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is SF3’s debt level acceptable?
With a debt-to-equity ratio of 17%, SF3’s debt level may be seen as prudent. This range is considered safe as SF3 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
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SF3 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. 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 SF3’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research STS Group to get a better picture of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for SF3’s future growth? Take a look at our free research report of analyst consensus for SF3’s outlook.
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Valuation: What is SF3 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SF3 is currently mispriced by the market.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.