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While small-cap stocks, such as ASM Group S.A. (WSE:ASM) with its market cap of zł188m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into ASM here.
ASM’s Debt (And Cash Flows)
Over the past year, ASM has ramped up its debt from zł21m to zł65m – this includes long-term debt. With this rise in debt, ASM currently has zł8.7m remaining in cash and short-term investments , ready to be used for running the business. Additionally, ASM has generated cash from operations of zł33m in the last twelve months, resulting in an operating cash to total debt ratio of 51%, indicating that ASM’s operating cash is sufficient to cover its debt.
Can ASM meet its short-term obligations with the cash in hand?
Looking at ASM’s zł169m in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of zł150m, leading to a current ratio of 0.89x. The current ratio is the number you get when you divide current assets by current liabilities.
Is ASM’s debt level acceptable?
ASM is a relatively highly levered company with a debt-to-equity of 81%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if ASM’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 ASM, the ratio of 2.51x 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.
Although ASM’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for ASM's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research ASM Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ASM’s future growth? Take a look at our free research report of analyst consensus for ASM’s outlook.
- Valuation: What is ASM 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 ASM is currently mispriced by the market.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.