Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
While small-cap stocks, such as Compagnie Financière de Neufcour S.A. (EBR:NEU) with its market cap of €4.6m, 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 NEU is loss-making right now, it’s crucial to evaluate 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, potential investors would need to take a closer look, and I recommend you dig deeper yourself into NEU here.
Does NEU Produce Much Cash Relative To Its Debt?
NEU has built up its total debt levels in the last twelve months, from €980k to €1.8m , which includes long-term debt. With this rise in debt, NEU's cash and short-term investments stands at €249k to keep the business going. We note it produced negative cash flow 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 assess some of NEU’s operating efficiency ratios such as ROA here.
Can NEU pay its short-term liabilities?
Looking at NEU’s €2.1m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of €3.4m, with a current ratio of 1.58x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Real Estate companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is NEU’s debt level acceptable?
NEU is a relatively highly levered company with a debt-to-equity of 44%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since NEU is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although NEU’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. Since there is also no concerns around NEU's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how NEU has been performing in the past. You should continue to research Compagnie Financière de Neufcour to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has NEU'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.