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Südzucker AG (FRA:SZU) is a small-cap stock with a market capitalization of €3.0b. 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? Since SZU is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into SZU here.
Does SZU Produce Much Cash Relative To Its Debt?
SZU has built up its total debt levels in the last twelve months, from €1.4b to €1.8b , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at €406m , ready to be used for running the business. Moreover, SZU has produced €243m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 14%, indicating that SZU’s operating cash is less than its debt.
Can SZU pay its short-term liabilities?
At the current liabilities level of €1.7b, the company has been able to meet these obligations given the level of current assets of €3.6b, with a current ratio of 2.13x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Food companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does SZU face the risk of succumbing to its debt-load?
With debt reaching 45% of equity, SZU may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since SZU is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although SZU’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 SZU's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure SZU has company-specific issues impacting its capital structure decisions. I suggest you continue to research Südzucker to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SZU’s future growth? Take a look at our free research report of analyst consensus for SZU’s outlook.
- Valuation: What is SZU 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 SZU 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.