Brüder Mannesmann Aktiengesellschaft (FRA:BMM) is a small-cap stock with a market capitalization of €6.1m. 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. 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 BMM here.
BMM’s Debt (And Cash Flows)
Over the past year, BMM has reduced its debt from €11m to €7.6m , which includes long-term debt. With this debt payback, BMM's cash and short-term investments stands at €4.4m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of BMM’s operating efficiency ratios such as ROA here.
Does BMM’s liquid assets cover its short-term commitments?
With current liabilities at €7.5m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.23x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can BMM service its debt comfortably?
BMM is a relatively highly levered company with a debt-to-equity of 91%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 BMM's case, the ratio of 1.06x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although BMM’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 BMM's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Brüder Mannesmann to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BMM’s future growth? Take a look at our free research report of analyst consensus for BMM’s outlook.
- Historical Performance: What has BMM'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.
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