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Investors are always looking for growth in small-cap stocks like Koninklijke BAM Groep nv (AMS:BAMNB), with a market cap of €1.1b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to 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, these checks don't give you a full picture, so I recommend you dig deeper yourself into BAMNB here.
BAMNB’s Debt (And Cash Flows)
Over the past year, BAMNB has reduced its debt from €503m to €343m , which also accounts for long term debt. With this reduction in debt, BAMNB's cash and short-term investments stands at €744m to keep the business going. On top of this, BAMNB has produced €209m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 61%, signalling that BAMNB’s current level of operating cash is high enough to cover debt.
Does BAMNB’s liquid assets cover its short-term commitments?
With current liabilities at €3.3b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.02x. The current ratio is calculated by dividing current assets by current liabilities. For Construction companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is BAMNB’s debt level acceptable?
BAMNB is a relatively highly levered company with a debt-to-equity of 47%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if BAMNB’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 BAMNB, the ratio of 1223x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as BAMNB’s high interest coverage is seen as responsible and safe practice.
BAMNB’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. 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 BAMNB's financial health. Other important fundamentals need to be considered alongside. You should continue to research Koninklijke BAM Groep to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BAMNB’s future growth? Take a look at our free research report of analyst consensus for BAMNB’s outlook.
- Valuation: What is BAMNB 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 BAMNB 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.