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Is adesso AG’s (FRA:ADN1) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like adesso AG (FRA:ADN1), with a market cap of €353m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the IT industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into ADN1 here.

Does ADN1 produce enough cash relative to debt?

Over the past year, ADN1 has maintained its debt levels at around €47m – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at €40m , ready to deploy into the business. On top of this, ADN1 has generated cash from operations of €26m in the last twelve months, leading to an operating cash to total debt ratio of 55%, signalling that ADN1’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ADN1’s case, it is able to generate 0.55x cash from its debt capital.

Does ADN1’s liquid assets cover its short-term commitments?

Looking at ADN1’s most recent €91m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.46x. For IT companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

DB:ADN1 Historical Debt October 29th 18

Can ADN1 service its debt comfortably?

With debt reaching 69% of equity, ADN1 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. We can check to see whether ADN1 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 ADN1’s, case, the ratio of 39.74x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although ADN1’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ADN1’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how ADN1 has been performing in the past. I suggest you continue to research adesso to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ADN1’s future growth? Take a look at our free research report of analyst consensus for ADN1’s outlook.
  2. Valuation: What is ADN1 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 ADN1 is currently mispriced by the market.
  3. 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.