Is Intershop Holding AG's (VTX:ISN) Balance Sheet Strong Enough To Weather A Storm?
Investors are always looking for growth in small-cap stocks like Intershop Holding AG (VTX:ISN), with a market cap of CHF998m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis 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. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into ISN here.
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Does ISN Produce Much Cash Relative To Its Debt?
ISN has sustained its debt level by about CHF602m over the last 12 months which accounts for long term debt. At this constant level of debt, the current cash and short-term investment levels stands at CHF134m , ready to be used for running the business. Additionally, ISN has generated cash from operations of CHF23m during the same period of time, resulting in an operating cash to total debt ratio of 3.8%, indicating that ISN’s operating cash is less than its debt.
Does ISN’s liquid assets cover its short-term commitments?
With current liabilities at CHF199m, it seems that the business may not have an easy time meeting these commitments with a current assets level of CHF193m, leading to a current ratio of 0.97x. The current ratio is the number you get when you divide current assets by current liabilities.
Can ISN service its debt comfortably?
ISN is a relatively highly levered company with a debt-to-equity of 87%. 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 test if ISN’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 ISN, the ratio of 12.2x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although ISN’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure ISN has company-specific issues impacting its capital structure decisions. You should continue to research Intershop Holding to get a better picture of the stock by looking at:
Valuation: What is ISN 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 ISN is currently mispriced by the market.
Historical Performance: What has ISN'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.
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.
