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Is Athena Investments A/S's (CPH:ATHENA) Balance Sheet A Threat To Its Future?

Simply Wall St

Investors are always looking for growth in small-cap stocks like Athena Investments A/S (CPH:ATHENA), with a market cap of ø760m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into ATHENA here.

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Does ATHENA Produce Much Cash Relative To Its Debt?

Over the past year, ATHENA has reduced its debt from €194m to €174m , which also accounts for long term debt. With this debt payback, ATHENA's cash and short-term investments stands at €67m to keep the business going. Moreover, ATHENA has produced cash from operations of €27m over the same time period, resulting in an operating cash to total debt ratio of 16%, meaning that ATHENA’s debt is not covered by operating cash.

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

At the current liabilities level of €31m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.95x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Renewable Energy companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

CPSE:ATHENA Historical Debt, May 23rd 2019

Does ATHENA face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 82%, ATHENA can be considered as an above-average leveraged company. 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 ATHENA’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 ATHENA, the ratio of 3.38x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ATHENA ample headroom to grow its debt facilities.

Next Steps:

Although ATHENA’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 ATHENA's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ATHENA's financial health. Other important fundamentals need to be considered alongside. You should continue to research Athena Investments to get a better picture of the small-cap by looking at:

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

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 editorial-team@simplywallst.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.