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While small-cap stocks, such as Gaussin SA (EPA:ALGAU) with its market cap of €46m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since ALGAU is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into ALGAU here.
ALGAU’s Debt (And Cash Flows)
ALGAU's debt levels have fallen from €27m to €11m over the last 12 months , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at €4.2m to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of ALGAU’s operating efficiency ratios such as ROA here.
Does ALGAU’s liquid assets cover its short-term commitments?
With current liabilities at €6.1m, the company has been able to meet these commitments with a current assets level of €11m, leading to a 1.73x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ALGAU face the risk of succumbing to its debt-load?
ALGAU is a relatively highly levered company with a debt-to-equity of 82%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since ALGAU is currently unprofitable, 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.
ALGAU’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ALGAU's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ALGAU's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Gaussin to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has ALGAU'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 firstname.lastname@example.org. 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.