Olympique Lyonnais Groupe SA (EPA:OLG) is a small-cap stock with a market capitalization of €156m. 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? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into OLG here.
Does OLG produce enough cash relative to debt?
OLG’s debt levels have fallen from €248m to €231m over the last 12 months – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at €9m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of OLG’s operating efficiency ratios such as ROA here.
Can OLG meet its short-term obligations with the cash in hand?
With current liabilities at €72m, the company has been able to meet these commitments with a current assets level of €142m, leading to a 1.97x current account ratio. Generally, for Entertainment companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does OLG face the risk of succumbing to its debt-load?
With debt reaching 90% of equity, OLG may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if OLG’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 OLG, the ratio of 3.01x suggests that interest is appropriately 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.
At its current level of cash flow coverage, OLG has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how OLG has been performing in the past. I suggest you continue to research Olympique Lyonnais Groupe to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OLG’s future growth? Take a look at our free research report of analyst consensus for OLG’s outlook.
- Valuation: What is OLG 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 OLG 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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