Investors are always looking for growth in small-cap stocks like Visiativ SA (EPA:ALVIV), with a market cap of €85m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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 not a comprehensive overview, so I recommend you dig deeper yourself into ALVIV here.
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Does ALVIV Produce Much Cash Relative To Its Debt?
ALVIV's debt levels surged from €25m to €52m over the last 12 months , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at €35m to keep the business going. On top of this, ALVIV has generated cash from operations of €7.6m in the last twelve months, leading to an operating cash to total debt ratio of 15%, indicating that ALVIV’s debt is not covered by operating cash.
Can ALVIV meet its short-term obligations with the cash in hand?
With current liabilities at €85m, it appears that the company has been able to meet these commitments with a current assets level of €108m, leading to a 1.27x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can ALVIV service its debt comfortably?
With total debt exceeding equity, ALVIV is considered a highly levered company. 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 ALVIV’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 ALVIV, the ratio of 10.41x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
ALVIV’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 ALVIV's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ALVIV's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Visiativ to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALVIV’s future growth? Take a look at our free research report of analyst consensus for ALVIV’s outlook.
- Valuation: What is ALVIV 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 ALVIV 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.
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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.