Investors are always looking for growth in small-cap stocks like BE Semiconductor Industries N.V. (AMS:BESI), with a market cap of €2.0b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, 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. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into BESI here.
BESI’s Debt (And Cash Flows)
Over the past year, BESI has maintained its debt levels at around €276m which accounts for long term debt. At this stable level of debt, BESI currently has €426m remaining in cash and short-term investments , ready to be used for running the business. Additionally, BESI has generated cash from operations of €184m over the same time period, resulting in an operating cash to total debt ratio of 67%, indicating that BESI’s current level of operating cash is high enough to cover debt.
Can BESI meet its short-term obligations with the cash in hand?
Looking at BESI’s €101m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.98x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is BESI’s debt level acceptable?
With a debt-to-equity ratio of 74%, BESI can be considered as an above-average leveraged company. 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 BESI's case, the ratio of 17.86x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving BESI ample headroom to grow its debt facilities.
Although BESI’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 BESI'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 BESI has been performing in the past. I recommend you continue to research BE Semiconductor Industries to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BESI’s future growth? Take a look at our free research report of analyst consensus for BESI’s outlook.
- Valuation: What is BESI 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 BESI 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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