U.S. Markets close in 3 hrs 4 mins

Is Egide S.A.'s (EPA:GID) Balance Sheet A Threat To Its Future?

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Investors are always looking for growth in small-cap stocks like Egide S.A. (EPA:GID), with a market cap of €11m. However, an important fact which most ignore is: how financially healthy is the business? Given that GID is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into GID here.

Does GID Produce Much Cash Relative To Its Debt?

Over the past year, GID has maintained its debt levels at around €6.9m which accounts for long term debt. At this constant level of debt, GID's cash and short-term investments stands at €2.4m to keep the business going. On top of this, GID has generated cash from operations of €447k during the same period of time, leading to an operating cash to total debt ratio of 6.5%, signalling that GID’s current level of operating cash is not high enough to cover debt.

Can GID pay its short-term liabilities?

Looking at GID’s €7.3m in current 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 2.06x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Electronic companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

ENXTPA:GID Historical Debt, July 15th 2019

Is GID’s debt level acceptable?

GID is a relatively highly levered company with a debt-to-equity of 63%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since GID is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Although GID’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 GID'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 GID has been performing in the past. I recommend you continue to research Egide to get a better picture of the small-cap by looking at:

  1. Valuation: What is GID 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 GID is currently mispriced by the market.
  2. Historical Performance: What has GID's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  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.