Amper, S.A. (BME:AMP) is a small-cap stock with a market capitalization of €277m. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into AMP here.
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Does AMP Produce Much Cash Relative To Its Debt?
AMP has built up its total debt levels in the last twelve months, from €25m to €27m , which includes long-term debt. With this rise in debt, AMP currently has €13m remaining in cash and short-term investments , ready to be used for running the business. Additionally, AMP has generated cash from operations of €4.5m over the same time period, resulting in an operating cash to total debt ratio of 16%, signalling that AMP’s current level of operating cash is not high enough to cover debt.
Does AMP’s liquid assets cover its short-term commitments?
With current liabilities at €83m, 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. For Communications companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is AMP’s debt level acceptable?
With debt reaching 67% of equity, AMP 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AMP's case, the ratio of 23.25x 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.
Although AMP’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. This is only a rough assessment of financial health, and I'm sure AMP has company-specific issues impacting its capital structure decisions. I recommend you continue to research Amper to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMP’s future growth? Take a look at our free research report of analyst consensus for AMP’s outlook.
- Valuation: What is AMP 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 AMP 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.
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