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Investors are always looking for growth in small-cap stocks like EuKedos S.p.A. (BIT:EUK), with a market cap of €23m. However, an important fact which most ignore is: how financially healthy is the business? 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into EUK here.
Does EUK Produce Much Cash Relative To Its Debt?
EUK has shrunk its total debt levels in the last twelve months, from €19m to €16m , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at €4.0m to keep the business going. Moreover, EUK has generated €5.1m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 31%, meaning that EUK’s operating cash is sufficient to cover its debt.
Can EUK meet its short-term obligations with the cash in hand?
Looking at EUK’s €15m in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of €12m, leading to a current ratio of 0.76x. The current ratio is calculated by dividing current assets by current liabilities.
Is EUK’s debt level acceptable?
EUK is a relatively highly levered company with a debt-to-equity of 54%. 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 EUK's case, the ratio of 5.03x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as EUK’s high interest coverage is seen as responsible and safe practice.
EUK’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. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure EUK has company-specific issues impacting its capital structure decisions. I suggest you continue to research EuKedos to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EUK’s future growth? Take a look at our free research report of analyst consensus for EUK’s outlook.
- Valuation: What is EUK 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 EUK 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.