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Medicover AB (publ) (STO:MCOV B) is a small-cap stock with a market capitalization of kr11b. 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? Evaluating financial health as part of your investment thesis is vital, 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 recommend you dig deeper yourself into MCOV B here.
MCOV B’s Debt (And Cash Flows)
MCOV B's debt levels surged from €58m to €288m over the last 12 months – this includes long-term debt. With this growth in debt, MCOV B's cash and short-term investments stands at €49m to keep the business going. Moreover, MCOV B has generated €55m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 19%, signalling that MCOV B’s current level of operating cash is not high enough to cover debt.
Does MCOV B’s liquid assets cover its short-term commitments?
With current liabilities at €137m, it seems that the business has been able to meet these commitments with a current assets level of €182m, leading to a 1.33x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Healthcare 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.
Is MCOV B’s debt level acceptable?
MCOV B is a relatively highly levered company with a debt-to-equity of 46%. 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 MCOV B’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 MCOV B, the ratio of 11.74x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as MCOV B’s high interest coverage is seen as responsible and safe practice.
MCOV B’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 MCOV B's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure MCOV B has company-specific issues impacting its capital structure decisions. I recommend you continue to research Medicover to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MCOV B’s future growth? Take a look at our free research report of analyst consensus for MCOV B’s outlook.
- Valuation: What is MCOV B 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 MCOV B 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.
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 email@example.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.