While small-cap stocks, such as Socfinaf S.A. (BDL:SOFAF) with its market cap of €212m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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 suggest you dig deeper yourself into SOFAF here.
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SOFAF’s Debt (And Cash Flows)
SOFAF has built up its total debt levels in the last twelve months, from €184m to €214m – this includes long-term debt. With this increase in debt, SOFAF's cash and short-term investments stands at €35m to keep the business going. Moreover, SOFAF has generated cash from operations of €91m over the same time period, leading to an operating cash to total debt ratio of 43%, meaning that SOFAF’s debt is appropriately covered by operating cash.
Can SOFAF pay its short-term liabilities?
At the current liabilities level of €323m, it appears that the company may not be able to easily meet these obligations given the level of current assets of €140m, with a current ratio of 0.43x. The current ratio is the number you get when you divide current assets by current liabilities.
Can SOFAF service its debt comfortably?
SOFAF is a relatively highly levered company with a debt-to-equity of 56%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 SOFAF's case, the ratio of 4.66x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SOFAF ample headroom to grow its debt facilities.
Although SOFAF’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure SOFAF has company-specific issues impacting its capital structure decisions. You should continue to research Socfinaf to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SOFAF’s future growth? Take a look at our free research report of analyst consensus for SOFAF’s outlook.
- Valuation: What is SOFAF 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 SOFAF 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 firstname.lastname@example.org. 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.