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Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M) is a small-cap stock with a market capitalization of €1.0b. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to 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, these checks don't give you a full picture, so I recommend you dig deeper yourself into A3M here.
A3M’s Debt (And Cash Flows)
A3M's debt levels surged from €215m to €317m over the last 12 months – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at €134m to keep the business going. Additionally, A3M has produced €166m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 52%, signalling that A3M’s debt is appropriately covered by operating cash.
Can A3M meet its short-term obligations with the cash in hand?
At the current liabilities level of €573m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.29x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Media companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does A3M face the risk of succumbing to its debt-load?
With debt reaching 71% of equity, A3M may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether A3M 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 A3M's, case, the ratio of 26.1x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving A3M ample headroom to grow its debt facilities.
Although A3M’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for A3M's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Atresmedia Corporación de Medios de Comunicación to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for A3M’s future growth? Take a look at our free research report of analyst consensus for A3M’s outlook.
- Valuation: What is A3M 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 A3M 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.